Is Game Theory Applicable Here?

[AaronBrown]

It's trivially easy if you make decisions by expected value, but most people don't. Almost everyone accepts both deals. This has been measured by poll and by real choices, in some cases with significant amounts of money at stake. It has been verified in many cultures and situations.

In A, you give up a 10% chance to make $2 million (converting $500,000 to $2,500,000) in order to eliminate a 1% chance of losing $500,000 (going from $500,000 to zero).

In B, you give up a 1% chance of getting $500,000 instead of zero, in order to get a 10% chance of getting $2,500,000 instead of $500,000.

Here is a good link to the paradox (without my poker gloss).

My point is that if you don't use expected value to make decisions, it's easy to find yourself making inconsistent decisions.