The Allais paradox constitutes a central violation of the expected utility paradigm. The paradox is typically explained by subjective probability weighing, and has motivated and shaped the leading non-expected-utility models. But why do people weigh probabilities? We suggest a new explanation for the Allais paradox based on evolutionary theory. We show that the evolutionary goal of maximizing the probability of having descendants forever (i.e. minimizing the probability of eventual extinction) predicts the Allais paradox and the common-consequence and common-ratio effects, and thus provides a rational-expectations theoretical foundation for the experimentally observed behavior.
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- Allais paradox
- Common-consequence effect
- Common-ratio effect
- Risk preferences