LEC 3 - ANOMALIES IN EXPECTED UTILITY THEORY

Question 1

what is a prospect

Answer 1

a number of possible outcomes along with their associated probabilities

Question 2

what axiom does Allais violate

Answer 2

Independence/substitution axiom
Also called Common consequence effect

Sure-thing principle

Your decision should not be influenced by sure things

Question 3

whats the axiom completeness mean

Answer 3

always have a preference

Question 4

how would you write a prospect r with a 50% chance of winning 100 and 50% chance of not winning anything

Answer 4

Question 5

how would you write the prospect S: certainty of winning 45

Answer 5

S=(45)

Question 6

what does the EUT axiom for completeness mean for all q, r

Answer 6

either q>r or r>q or q∼r (indifferent)

Question 7

what’s the EUT axiom for transitivity mean

Answer 7

Question 8

what does the EUT axiom continuity say

Answer 8

can write r as a combination of q and s

Question 9

what’s the independence EUT axiom and example

Answer 9

for all prospects q r s

if q>r then (q, p;s, 1-p)> (r, p; s, 1-p), for all p

can make probability tree for example

Question 10

allais problem (common consequence effect), independence problem, example, how to set it up

Answer 10

Question 11

common ratio effect

Answer 11

Question 12

difference between allais and Ellsberg paradox

Answer 12

 Allais Paradox; objective probabilities
were known
 Ellsberg (1961); no objective
probabilities

Question 13

what’s the Ellsberg paradox

Answer 13

The Ellsberg paradox is a paradox of choice in which people’s decisions produce inconsistencies with subjective expected utility theory

Question 14

how does the Ellsberg paradox violate SEU

Answer 14

we don’t think in terms of these probabilities. just don’t like the probabilities are not given

Question 15

in subjective expected utility how can we tell if x is preferred to y

Answer 15

x is preferred to y if SEU(x) is larger than SEU(y)

subjective EU

Question 16

what does risk mean

Answer 16

when a person is not sure which state will occur but knows the probabilities of each state

Question 17

what does certainty mean

Answer 17

when a person knows one state will occur with certainty

Question 18

what does ambiguity mean

Answer 18

when a person is not sure what the distribution of probabilities is

Question 19

what is ambiguity aversion

Answer 19

Unwillingness to take on gambles with ambiguous probabilities

Question 20

3 colour problem Ellsberg paradox. need to learn. recap nov16 9mins

Answer 20

important.

Question 21

summarise the fox and tversky paper 1995

Answer 21

aim: does ambiguity aversion exist in the absence of a contrast between clear and ambiguous

comparative - max wtp to play bag A and bag B, both bags presented - found strong ambiguity aversion - wtp more on clear bet then vague

non comparative - max wtp to play either bag A or B, each subject sees one bag - no evidence of ambiguity aversion - wtp less on clear bet then vague

Question 22

difference between within and between subject design

Answer 22

Between-subjects (or between-groups) study design: different people test each condition, so that each person is only exposed to a single user interface.
Within-subjects (or repeated-measures) study design: the same person tests all the conditions (i.e., all the user interfaces).

For example, if we wanted to compare two car-rental sites A and B by looking at how participants book cars on each site, our study could be designed in two different ways, both perfectly legitimate:

Between-subjects: Each participant could test a single car-rental site and book a car only on that site.
Within-subjects: Each participant could test both car-rental sites and book a car on each.