Alice In Wonderland Effect



ALLAIS PARADOX/EFFECT. The French economist Maurice Allais (1911- ) described this paradox/effect of decision-making that typically yields results that are inconsistent with expected utility theory. In choosing between sets of alternative probability statements, people usually prefer the total certainty or high probability of winning a large amount of money, for example, to the small probability of winning an even larger amount that is associated with a risk of winning nothing at all. However, in subsequent alternative choice situations, the same people prefer a condition in which the payoff is much larger in one than in the other condition - even though the probabilities of winning are nearly the same in both of the two conditions. Such a contradiction in people's choice behavior indicates that expected utility theory does not completely or accurately describe humans' decision-making behaviors. Other related paradoxes/effects in choice decision-making situations include: the common ratio effect - situations where people prefer a guaranteed substantial payoff without an associative risk, but also prefer a high payoff in a condition having only a slightly greater associative risk; the Ellsberg paradox, also called the Ellsberg-Fellner paradox and the modified Ellsberg paradox - named after the American political analyst Daniel Ellsberg (1931- ) and the American economist William Fellner (1905-1983) - situations where people tend to maximize expected utility or subjective expected utility in judgments involving risk, to use "maximin strategies" to maximize minimum utility in judgments involving uncertainty, and to use "compromise strategies" when the degree of confidence in their probability estimates is intermediate between risk (high confidence) and uncertainty (low confidence); according to the Ellsberg paradox, when personal confidence is derived from the type, amount, reliability, and unanimity of information, it is suggested that expected utility theory and subjective utility theory apply to situations of risk but not necessarily to situations involving uncertainty; and the St. Petersburg paradox/game - named after the St. Petersburg Academy where the Swiss mathematician/physicist Daniel Bernoulli (1700-1782) first presented it in 1738 - hypothetical gambling situations where payoffs increase with each trial but where, also, there is a trade-off in which one must make choices as to how much to pay to play the game; in such cases, according to probability theory, it becomes absurd to pay a large amount for the opportunity to play the game because there is a high probability of losing everything, and such gaming conditions destroy the principle of maximizing expected utility; Bernoulli's notion of "mental worth" -which later was called utility (i.e., a measure of the subjective desirability of an event or outcome that corresponds to the person's preference for it) - followed directly from the enunciation of the St. Petersburg paradox/game. All of these paradoxical effects in choice decision-making situations point out instances in which people's choice responses either violate, or are inconsistent with, classical expected utility theory. See also DECISION-MAKING THEORIES; EXPECTED UTILITY THEORY; PROBABILITY THEORY/LAWS; PROSPECT THEORY. REFERENCES

Bernoulli, D. (1738). Hydrodynamica. Argen-

torati: Dulseckeri. Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. Quarterly Journal of Economics, 75, 643-669.

Fellner, W. (1961). Distortion of subjective probabilities as a reaction to uncertainty. Quarterly Journal of Economics, 75, 670-689. Allais, M., & Hagen, O. (Eds.) (1979). Expected utility hypotheses and the Allais paradox: Contemporary discussions of decisions under uncertainty. Boston: D. Reidel. Kadane, J. B. (1992). Healthy skepticism as an expected utility explanation of the phenomenon of Allais and Ellsberg. Theory & Decision, 32, 57-64.


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