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  3. problem 3 recall the allais paradox from lecture question 1...

Question: problem 3 recall the allais paradox from lecture question 1...

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Problem 3. Recall the Allais paradox from lecture. Question 1: (S1,1) or (S1,0.89; $5,0.10; $0, 0.01) Question 2: (S1, 0.11; $0,0.89) or ($5,0.10; S0,0.90) Most people prefer the first lottery in Question 1 but the second lottery in Question 2 Suppose someone chooses according to prospect theory with value function r if 20 u (z) = 2x if x 0 where all units are in millions of dollars. The probability weighing function they use is VP Show that even without any editing, this can explain the Allais paradox (set reference point to $0 in both questions)

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