Good post! I generally agree with the general thrust to be more flexible in what counts as a rational behaviour, but about one specific example of Allais paradox, do we even need to abandon EUT to explain it? In practice, the bet involves money, and if we do have a utility function, it isn’t “money” at all; it’s whatever psychological benefits (safety, comfort, pleasure) money can afford us.
Now on one hand we have five millions compared to one million, and we know the growth of the utility of money is somewhat sublinear—the first million is a lot more valuable to us than the second, as we have a hard floor of physical needs. On the other we have the fact that, depending on who we are, getting nothing might cause us significant distress—regret at a missed opportunity, guilt towards our dependents. So that zero really is a quite large negative number, potentially. The same regret isn’t there if our choice didn’t really give us a certainty option. So in that framework, the use of money is what’s misleading—it doesn’t rule out a real underlying utility function, it’s just not affinely equivalent to it.
Good post! I generally agree with the general thrust to be more flexible in what counts as a rational behaviour, but about one specific example of Allais paradox, do we even need to abandon EUT to explain it? In practice, the bet involves money, and if we do have a utility function, it isn’t “money” at all; it’s whatever psychological benefits (safety, comfort, pleasure) money can afford us.
Now on one hand we have five millions compared to one million, and we know the growth of the utility of money is somewhat sublinear—the first million is a lot more valuable to us than the second, as we have a hard floor of physical needs. On the other we have the fact that, depending on who we are, getting nothing might cause us significant distress—regret at a missed opportunity, guilt towards our dependents. So that zero really is a quite large negative number, potentially. The same regret isn’t there if our choice didn’t really give us a certainty option. So in that framework, the use of money is what’s misleading—it doesn’t rule out a real underlying utility function, it’s just not affinely equivalent to it.
Please see note 5.