Consider two prospects:
Problem 1: Choose between
Prospect A: $2,500 with probability .33,
$2,400 with probability .66,
Zero with probability .01.
And Prospect B: $2,400 with certainty.
Problem 2: Choose between
Prospect C: $2,500 with probability .33,
Zero with probability .67.
And Prospect D: $2,400 with probability .34,
Zero with probability .66.
It has been shown by Daniel Kahneman and Amos Tversky (1979, "Prospect theory: An analysis of decision under risk," Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?