Allais paradox
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by
Steven
N.
Durlauf and
Lawrence
E.
Blume
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Abstract
The ‘Allais paradox’ is that risk-averse persons’ choices between alternatives tend to vary according to the absolute amounts of potential gain involved in different pairs of alternatives, even though rational choice between alternatives should depend only on how the alternatives differ. But there is no paradox once we accept the non-identity of monetary and psychological values and the importance of the distribution of cardinal utility about its average value.
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Keywords
Allais paradox; Allais, M.; Bernoulli, N.; cardinal utility; de Finetti, B.; expectations; Harsanyi, J. C.; independence; preferences; propensity for risk; psychological versus monetary value; random choice; psychology of risk; Samuelson, P. A.; Savage, L. J.; St Petersburg paradox; von Neumann and MorgensternHow to cite this article
Allais, Maurice. "Allais paradox." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 09 February 2010 <http://www.dictionaryofeconomics.com/article?id=pde2008_A000074> doi:10.1057/9780230226203.0032
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