consider two decision problems. The Three-Colour Problem. An urn contains 9 balls. Exactly three balls are...

   

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consider two decision problems. The Three-Colour Problem. An urn contains 9 balls. Exactly three balls are Red. Each of the remaining six balls are either Yellow or Black. Consider the following: Option a : Win £100 if a red ball is drawn, zero otherwise Option b : Win £100 if a yellow ball is drawn, zero otherwise. Most people strictly prefer option a over option b. Now consider the following options: Option a' : Win £100 if a red or a black ball is drawn, zero otherwise Option b' : Win £100 if a yellow or a black ball is drawn, zero otherwise. Most people strictly prefer option b' over option a'. The Two-Colour Problem. There are two identical urns, urn 1 and urn 2. Both urns contain 100 balls. Urn 1 contains 50 red balls and 50 blue balls. Urn 2 contains 100 balls, each of which is either red or blue. Consider the following: Option e : Win £100 if a red ball is drawn from urn 1, zero otherwise. Option d : Win £100 if a red ball is drawn from urn 2, zero otherwise. Most people strictly prefer option c over option d. Now consider the following options: Option c' : Win £100 if a blue ball is drawn from urn 1, zero otherwise. Option d' : Win £100 if a blue ball is drawn from urn 2, zero otherwise. Most people strictly prefer option e' over option d'. Discuss the reasons why such preferences might be prevalent and discuss the implications for (subjective) expected utility theory and its underlying principles. consider two decision problems. The Three-Colour Problem. An urn contains 9 balls. Exactly three balls are Red. Each of the remaining six balls are either Yellow or Black. Consider the following: Option a : Win £100 if a red ball is drawn, zero otherwise Option b : Win £100 if a yellow ball is drawn, zero otherwise. Most people strictly prefer option a over option b. Now consider the following options: Option a' : Win £100 if a red or a black ball is drawn, zero otherwise Option b' : Win £100 if a yellow or a black ball is drawn, zero otherwise. Most people strictly prefer option b' over option a'. The Two-Colour Problem. There are two identical urns, urn 1 and urn 2. Both urns contain 100 balls. Urn 1 contains 50 red balls and 50 blue balls. Urn 2 contains 100 balls, each of which is either red or blue. Consider the following: Option e : Win £100 if a red ball is drawn from urn 1, zero otherwise. Option d : Win £100 if a red ball is drawn from urn 2, zero otherwise. Most people strictly prefer option c over option d. Now consider the following options: Option c' : Win £100 if a blue ball is drawn from urn 1, zero otherwise. Option d' : Win £100 if a blue ball is drawn from urn 2, zero otherwise. Most people strictly prefer option e' over option d'. Discuss the reasons why such preferences might be prevalent and discuss the implications for (subjective) expected utility theory and its underlying principles.

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The expected utility theory guides decision making whenever we have uncertain payoffs A rational ind... View the full answer