In this question we will consider two decision problems.

1. 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 Win 100 if a red ball is drawn, zero otherwise
• Option Win 100 if a yellow ball is drawn, zero otherwise. Most people strictly prefer option over option .
• Now consider the following options:
• Option ' Win 100 if a red or a black ball is drawn, zero otherwise
• Option ' Win 100 if a yellow or a black ball is drawn, zero otherwise. Most people strictly prefer option ' over option '.

1. 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 Win 100 if a red ball is drawn from urn 1, zero otherwise.
• Option Win 100 if a red ball is drawn from urn 2, zero otherwise. Most people strictly prefer option over option .
• Now consider the following options: Option ' Win 100 if a blue ball is drawn from urn 1, zero otherwise.
• Option ' Win 100 if a blue ball is drawn from urn 2, zero otherwise.
• Most people strictly prefer option ' over option '.

Discuss the reasons why such preferences might be prevalent and discuss the implications for (subjective) expected utility theory and its underlying principles.