Describe violate expected utility theory

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Reference no: EM131450946

Question: Consider two problems:

Problem 1: Choose between Prospect A and Prospect B.

Prospect A: $2,500 with probability .33,

$2,400 with probability .66,

Zero with probability .01.

Prospect B: $2,400 with certainty.

Problem 2: Choose between Prospect C and Prospect D.

Prospect C: $2,500 with probability .33,

Zero with probability .67.

Prospect D: $2,400 with probability .34,

Zero with probability .66.

It has been shown by Daniel Kahneman and Amos Tversky (1979, "Prospect theory: An analysis of decision under risk," Econometrica 47(2), 263-291) that more people choose B when presented with

Problem 1. and more people choose C when presented with

Problem 2. These choices violate expected utility theory. Why?

Reference no: EM131450946

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