Please see the embolden sentence below. Assume that I'm risk adverse and "prefer the known chance over the unknown". Why's it irrational for me to choose A?
> Also, there were problems on the probability side. One famous debate concerned a paradox posed by Daniel Ellsberg (of later fame due to publishing the Pentagon Papers) It involved multiple urns, some with known and some with unknown odds of drawing a winning ball. Instead of estimating the expected value of the unknown probability, and sticking with that estimate, most people exhibit strong aversion to ambiguity in violation of basic probability principles. A simpler version of the paradox would be as follows. You can choose one of two urns, each containing red and white balls. If you draw red you win $100 and nothing otherwise. You know that urn A has exactly a 50-50 ratio of red and white balls. In urn B, the ratio is unknown. From which urn do you wish to draw? Most people say A since they prefer the known chance over the unknown, especially since some suspect that urn B is perhaps stacked against them. But even if people can choose the color on which to bet, they still prefer A. **Rationally, you should be indifferent**, or if you think you can guess the color ratios, choose the urn with the better perceived odds of winning. Yet, smart people would knowingly violate this logical advice.
Paul Slovic, *The Irrational Economist* (2010), p 56.
Chgg Clou
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2021-06-06T00:12:44Z (over 3 years ago)