The Allais Paradox

The Allais Paradox illustrates a conflict between expected utility theory and actual human choices. In a famous experiment, people are given two choices involving lotteries with varying probabilities and outcomes. Many people choose options that violate the predictions of expected utility theory, suggesting that they don't always act rationally when it comes to risk. This paradox highlights how people's preferences can be influenced by factors like the framing of choices and the certainty of outcomes, showcasing the complexities of human decision-making beyond traditional economic models.