Allais Paradox

The Allais Paradox highlights a contradiction in people's choices under risk. It presents a scenario where individuals choose between two sets of options involving monetary gains. Many people prefer a certain outcome (guaranteed money) over a gamble with a higher expected value, contradicting expected utility theory which suggests that rational choices should maximize expected value. This paradox reveals that human decision-making often deviates from traditional economic theories, influenced by factors like certainty and perceived risk, demonstrating that our choices can be inconsistent and shaped by psychological biases.