= = A generic lottery that offers the payoff x with probability and the payoff y...

 

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π = = A generic lottery that offers the payoff x with probability and the payoff y with probability 1-7 can be denoted with the triple (x, y, 7). Consider the following four lotteries: L¹ = (10000,0,0.1), L² (15000, 0, 0.09), L³ (10000,0,1), and L¹= (15000,0,.9). In experiments, investors frequently report that they prefer L2 to L¹, while also reporting that they prefer L³ to L. Researchers claim that this is evidence against expected utility theory. Using the tools and terminology developed in this course, explain why these choices are inconsistent with expected utility theory. π = = A generic lottery that offers the payoff x with probability and the payoff y with probability 1-7 can be denoted with the triple (x, y, 7). Consider the following four lotteries: L¹ = (10000,0,0.1), L² (15000, 0, 0.09), L³ (10000,0,1), and L¹= (15000,0,.9). In experiments, investors frequently report that they prefer L2 to L¹, while also reporting that they prefer L³ to L. Researchers claim that this is evidence against expected utility theory. Using the tools and terminology developed in this course, explain why these choices are inconsistent with expected utility theory.