Concept explainers
Psychology of
Decision 1
Option A: 100% chance of gaining $1,000,000
Option B: 10% chance of gaining $2,500,000; 89% chance of gaining $1,000,000; and 1% chance of gaining nothing
Decision 2
Option A: 11% chance of gaining $1,000,000 and 89% chance of gaining nothing
Option B: 10% chance of gaining $2,500,000 and 90% chance of gaining nothing
Allais discovered that for Decision 1, most people chose Option A, while for Decision 2, most people chose Option B.
- a. For each decision, find the expected value of each option.
- b. Are the responses given in the survey consistent with the expected values?
- c. Give a possible explanation for the responses in Allais’s survey.
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