PRM Axioms

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PRM Axioms

Postby ameyakukde » Fri Apr 05, 2013 6:56 pm

The axiom of independence of choice states that "Our preference order between two lotteries should not be affected if these lotteries are part of the same wider range of possibilities"
The question asked in Quiz 2 on Risk & Risk aversion is :
Maurice Allais, a Frenchman who was awarded Nobel Prize in economics in 1988 conducted two similar experiments on different set of people. Each experiment dealt with gamble and outlined probability of winning a certain amount of money with certain probability. The experiments were as follows
Experiment 1
Gamble 1A: 100% chance of winning $1 million
Gamble 1B: 89% chance of winning $1 million, 10% chance of winning $5 million and 1% of chance of winning nothing
Experiment 2
Gamble 2A: 89% chance of winning nothing, 11% chance of winning $1 million
Gamble 2B: 90% chance of winning nothing, 10% chance of winning $5 million
Allais observed that most people preferred gamble 1A to gamble 1B and gamble 2B to gamble 2A. This is called “Allais Paradox” and Allais presented this phenomenon as an example of violation of one axiom of utility.

How do the choices presented represent the choices from the same wider range of possibilities??

Also, give us more examples from axioms of independence of choice. Only one example in addition to the handbook example is covered. AT LEAST, mention the source from where we can get examples in case you the pristine study material doesn't provide the depth I am looking for.
In such quesn it is obvious that the question is fron axiom of independence. DO you know of an example where there is a little tweak and we could get trapped?
I mean if you give us 2 gambles and 4 choices it is obv that the axiom is from independence of choice. Kindly share an example where this is not the case. I appreciate your time and help.

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