Example 1

(n = 17)

A.

Outcome:

$3,000

Probability:

1.0

10

B.

Outcome: Probability:

$4,000 0.8

$0 0.2

Example 2

C.

Outcome:

$3,000

$0

Probability:

0.25

0.75

D.

Outcome: Probability:

$4,000 0.2

$0 0.8

13

Why is satisfying the Independence Axiom a good thing?

Why is satisfying the Independence Axiom a good thing?

Outcome: Probability: $3,000 1.0 Outcome: $4,000 $0 0.2

Probability: 0.8

Outcome: Probability:

$3,000 0.25

$0 0.75

Outcome:

$4,000

$0 0.8

Probability: 0.2

Why is satisfying the Independence Axiom a good thing?

Outcome: Probability: $3,000 1.0 Outcome: $4,000 $0 0.2

Probability: 0.8

Outcome: Probability:

$3,000 0.25

$0 0.75

Outcome:

$4,000

$0 0.8

Probability: 0.2

HH

other

HH

other

$3,000
1.0

$0
1.0

$4,000 $0
0.8 0.2

$0
1.0

Vulnerability to Money Pumps

Step 1: I give you a free ticket to participate in the lottery

HH

other

$3,000 1.0

$0 1.0

Step 2: If you pay me 1 cent, Ill upgrade you to the lottery

HH

other

$4,000 $0 0.8 0.2

$0 1.0

Vulnerability to Money Pumps

Step 3: Before we carry out the 2-stage lottery, I propose the following: If you pay me 1 cent, then when the coin lands HH, Ill swap
$4,000 $0 0.8 0.2

with a sure payment of $3,000. Step 4: Youre back to the starting point, but 2 cents poorer

HH

other

$3,000 1.0

$0 1.0

and we can continue

Treatment 1 (n=8) As a result of an epidemic disease, 600 people will die

There are 2 mutually exclusive treatments:

(A) Exactly 200 people will be saved

(5)

(B) With probability 1/3, all 600 people will be saved,

With probability 2/3, no one will be saved Which treatment would you choose?

(3)

Treatment 2 (n=9) As a result of an epidemic disease, 600 people will die

There are 2 mutually exclusive treatments:

(C) Exactly 400 people will die

(2) (7)

(D) With probability 2/3, all 600 people will die,

With probability 1/3, no one will die Which treatment would you choose?

As a result of an epidemic disease, 600 people will die (A) Exactly 200 people will be saved

(B) With probability 1/3, all 600 people will be saved,

With probability 2/3, no one will be saved

(C) Exactly 400 people will die

(D) With probability 2/3, all 600 people will die,

With probability 1/3, no one will die

Reference dependent preferences Loss Aversion Imagine that in addition to whatever you own, you have

been given $1,000. You are now asked to choose between

(A) 50-50 chance of winning $1,000 and winning $0

(1)

(B) winning $500 for sure

(8)

Imagine that in addition to whatever you own, you have been given $2,000. You are now asked to choose between (C) 50-50 chance of losing $1,000 and losing $0 (D) losing $500 for sure

(6)

(2)

You face the following pair of concurrent decisions.

First, examine both decisions, then make a choice from each decision.
Your overall payment will equal the sum of earnings in both decisions. Decision 1: (i) A sure gain of $2.40 (ii) 25% chance to gain $10.00, 75% chance to gain $0.00 Decision 2: (iii) A sure loss of $7.50 (iv) 75% chance to lose $10.00, 25% chance to lose $0.00

Example 3

1 7 1 8

A. (i) & (iii)

B. (i) & (iv)

C. (ii) & (iii) D. (ii) & (iv)

Consider the following pair of gambles. Suppose you could participate in only one of them. Which gamble would you choose?

Example 4

A. 25% chance to gain $2.50

B. 25% chance to gain $2.40

75% chance to lose $7.50

75% chance to lose $7.60

Narrow bracketting
Decision 1: (i) A sure gain of $2.40 (ii) 25% chance to gain $10.00, 75% chance to gain $0.00

(7 students)
Decision 2: (iii) A sure loss of $7.50 (iv) 75% chance to lose $10.00, 25% chance to lose $0.00

A.

B.

25% chance to gain $2.50

75% chance to lose $7.50

25% chance to gain $2.40

75% chance to lose $7.60

Choosing between Treatment a pair 1 of bets Color Blue 90 0 Red 6 45 Green Black 1 30 3 -15

A 5

Prob (%) Prize ($) Color

Blue

Red

Green Black

B 3

Prob (%) Prize ($)

90
0

7
45

1
-10

2
-15

Treatment 2 Color Blue 90 0 Red 6 45 Green Purple Black 1 30 1 -15 2 -15

C 0

Prob (%) Prize ($) Color

Blue

Red

Green Purple Black

D 9

Prob (%) Prize ($)

90
0

6
45

1
45

1
-10

2
-15

Treatment 2 Color Blue 90 0 Red 6 45 Green Purple Black 1 30 1 -15 2 -15

Prob (%) Prize ($) Color

Blue

Red

Green Purple Black

Prob (%) Prize ($)

90
0

6
45

1
45

1
-10

2
-15

Prob (%) Prize ($)

90 0

6 45

1 30

3 -15

A,C
Prob (%) Prize ($) 90 7 1 2

45

-10

-15

B,D