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Allais Paradox is best explained by (A) expected value; (B) expected utility; (C) prospect theory; (D)...

Allais Paradox is best explained by
(A) expected value;
(B) expected utility;
(C) prospect theory;
(D) none of the above.

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Answer #1

Option C Prospect Theory

Prospect Theory is a theory that people value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Allais Paradox refers to problem set designed by Mauric Allais to show that people are not rational and do not reason in accordance with expected value theory. Allais Paradox is an anomaly in the expected utility theory where people's choices are effected by outcomes that are the same in both (i.e. violates sure thing principle)

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