| Chapter 12 Independence: choice should depend only on outcomes that differ, not on those that are the same for both alternatives But people biased by framing effects Allais paradox Ellsberg paradox Consistency: if prefer one alternative to another, should prefer at least some chance of receiving that alternative if the odds are good enough Solvability: if prefer A to B to C, can determine value of B when indifferent to choosing B to probabilistic combination of A and C. May be biased by framing effects: Preference reversals When asked to choose between bets, pay attention to probabilities more When asked to set a price for individual bets, pay attention to payoffs more People do not follow expected utility theory; we should consider these axioms when making decisions but not be bound by them |
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