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Recall the Allais paradox Question 1: ($1, 1) or ($1,0.89; $5,0.10; $0,0.01) Question 2: ($1,0.11; $0,0.89) or ($5,0.10; $0,0.90) Most people prefer the first
Recall the Allais paradox Question 1: ($1, 1) or ($1,0.89; $5,0.10; $0,0.01) Question 2: ($1,0.11; $0,0.89) or ($5,0.10; $0,0.90) Most people prefer the first lottery in Question 1 but the second lottery in Question 2. Suppose someone chooses according to prospect theory with value function 10.1 if z 20 v (r) = 2.x if r < 0 where all units are in Sbillions. The probability weighing function they use is * (p) : Show that even without any editing, this can explain the Allais paradox (set reference point to $0 in both questions).
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