Allais Paradox: How Many Dollars Would You Prefer in This Possibility?

This paradox can occur in all areas of life, primarily in the economic and financial fields. Although we know that people normally make risk-free choices when making choices, This situation is a bit of a game changer.

This paradox, in which options are presented based on two different probability distributions, has been studied in depth in both economics and psychology and has been investigated under uncertainty. the complexity of the decision-making process It has created a rich discussion environment for understanding.

The Allais Paradox was put forward by Maurice Allais in 1953.

Expected Utility Theory In this paradox developed as a contrast, we see people challenging the traditional theory of economic behavior by questioning their tendency to make risky decisions.

According to Prospect Theory, individuals cannot act rationally and avoid risk as much as possible. This theory, as we understand it, states that individuals always will choose the biggest prize it makes us think. But not everyone thinks this way, and an example of how this theory does not work as stated in cases of uncertainty is this paradox developed by Maurice Allais.

Well, if we develop a scenario with you, Will irrational results occur?? Let’s give it a test.

Scenario 1:

A: 100% probability of $1 million chance to win.

B: 10% probability of $5 million89% chance of winning $1 million and 1% chance of winning nothing.

In this case, most people choose the surefire $1 million (option A) when choosing to avoid risk.

Scenario 2:

A: 11% probability of $1 million and an 89% chance of winning nothing.

D: 10% probability of $5 million and a 90% chance of winning nothing.

In this case, most people take a greater risk for a higher reward and He chooses D, i.e. 10% probability of $5 million.

The paradoxical situation is that people avoid risk in the first scenario, but prefer risk in the second scenario. expected in fact, a person either prefers the sure outcome in both cases or the high reward in both cases.

But most of the time people do not show this consistency. This; It shows that people consider not only expected returns but also the certainty of outcomes and their perception of risk in their decision-making processes.

In the Allais Paradox, most people prefer D in Scenario 2 even though they prefer A in Scenario 1.

As expected under normal conditions, The option with the least risk and the highest probability of winning was chosen. However, sometimes people may turn to these options if the profit increases even though the risk level is high. This is exactly what is explained in this paradox. What is expected is not always implemented.

According to the theory of rational economic behavior, having the same expectation value in both scenarios It is thought that a choice should be made between options B and D. However, according to the Allais Paradox, people often make choices contrary to this expected value, which proves to us the complexity of economic decision-making processes.

While we see that economic theories cannot fully explain human behavior, we should consider that emotional and psychological factors are effective in the decision-making process.

This situation, which shows us that the Expected Utility Theory does not always work and that people can give inconsistent answers when they make hasty decisions, can be encountered in all areas of life. Most people torn between two options will likely be inconsistent when faced with a sudden decision. You can see this best in people addicted to gambling.

Allais, this paradox While explaining this, theories were made about how people make these decisions. For example:

• Emotional Values ​​Theory: People are very likely to take momentary emotions into consideration when making risky decisions. In this case, preferences may change according to emotional values.
• Time Preference Theory: People may be influenced by instant gratification and procrastination in their choices about future gains and losses. This may also explain why some people choose option D.
• Logical Contradiction: People can make their judgments about probabilities logically contradictory. This can eliminate people’s rational decision-making process.

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