The Allais Paradox

URL:  http://www.wired.com/wiredscience/2010/10/the-allais-pa...

This minor change in notation soon revealed one of the most important discoveries of their careers. When Kahneman and Tversky framed questions in terms of gains and losses, they immediately realized that people hated losses. In fact, our dislike of losses was largely responsible for our dislike of risk in general. Because we felt the disadvantages of risky decisions (losses) more acutely than the advantages (gains), most risks struck us as bad ideas. This also made options that could be forecast with certainty seem especially alluring, since they were risk-free. As Kahneman and Tversky put it, “In human decision making, losses loom larger than gains.” They called this phenomenon “loss aversion”



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