We have seen three questions and the public response to those in the last post. While the expected value theory provides a decent conceptual basis, real-life decisions are typically taken based on risk perception, sometimes collected in the utility functions. Let’s analyse options and the popular answers to the three questions.
80% preference for sure $30 vs 80% chance for $45 is a clear case of risk aversion in all forms. People were willing to ignore that 8 out of 10 would get $45 had they given up the $30 in the bank.
Understanding the response to the second question was easy. The first stage was mandatory for the participants to play, and the options in the second stage were identical to the first question.
The intriguing response was the third one. In reality, the second and third questions are the same. Yet, almost half of people who went for the sure-shot $30 are now willing to bet for $45!
Tversky, A.; Kahneman, D., Science, 1981, 211, 453
