Difference between revisions of "AD/BC problem"
(Briefly describe the opening example of "Risk Policies" in "Thinking, Fast and Slow")
Revision as of 03:57, 30 April 2012
The chapter "Risk Policies", in Kahneman's "Thinking, Fast and Slow", opens with this example, which makes vivid the pitfalls of relying on our intuitions in choosing between bets:
Imagine that you face the following pair of concurrent decisions. First examine both decisions, then make your choices. Decision (i): Choose between
- A. sure gain of $240
- B. 25% chance to gain $1,000 and 75% chance to gain nothing
Decision (ii): Choose between
- C. sure loss of $750
- D. 75% chance to lose $1,000 and 25% chance to lose nothing
Most people, looking at both concurrently, choose A and D. Now consider this second choice:
AD. 25% chance to win $240 and 75% chance to lose $760 BC. 25% chance to win $250 and 75% chance to lose $750
Clearly, any sane person will choose BC here; it dominates option AD. However, AD is exactly the combination of options A and D, while BC is the combination of B and C.