
The Allais Paradox:
Gamble A: 100% chance of receiving $1 million.
Gamble B: 10% chance of receiving $5 million, 89% chance of receiving $1 million, and 1% chance of receiving nothing.
Gamble C: 11% chance of receiving $1 million, and an 89% chance of receiving nothing.
Gamble D: 10% chance of receiving $5 million, and a 90% chance of receiving nothing.
Most people would choose A over B, less money for no risk. Those same people would choose D over C, though, more money for more risk. Below is the expected value for each:
Gamble |
Expected Value |
A |
$1 million |
B |
$1.39 million |
C |
$110,000 |
D |
$500,000 |
* Formulas for the above can be found here.
Therein lies the paradox. If you are about expected value, you choose B and D, especially since the probabilities are the same.
You know what the real paradox is, though? I’m Asian, math SAT score was almost-perfect, English SAT score was ESL-esque (I was born in this country), and I get paid (not much) to write and I barely understand the Allais Paradox. No wonder my parents disowned me (They didn’t really, but I wouldn’t blame them if they did).
Damnit SON!!! What is all this mumbo jumbo and what does it have to do with Paxton and Urías?
Please, blog, may I have some more?