Home / Questions / In their famous ‘common ratio effect’ experiment, Kahneman and Tversky found that most peo...
In their famous ‘common ratio effect’ experiment, Kahneman and Tversky found that most people preferred $3000 with certainty over an 80% chance of $4000, but preferred a 20% chance of $4000 over a 25% chance of $3000. These gambles can be written as:
Choice 1:
A: ($3000, 1)
B: ($4000, 0.80; $0, 0.20)
Choice 2:
C: ($3000, 0.25; $0, 0.75)
D: ($4000, 0.20; $0, 0.80)
(Note: The value of lottery B is calculated as follows.
To show the choice pattern, you need to plug in the numbers for and and show that the value of lottery A is greater than the value of lottery B and that the value of lottery D is greater than the value of lottery C):
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