This page contains an explanation of a decision-making paradox, highlighted by a little quiz. You can see the results of the quiz on this page.

The paradox is illustrated by the following 2 questions:

Question 1

Which of the following options would you choose?
A: an 80% chance of winning a prize equal to 4 times your monthly income
B: a gift of 3 times your monthly income

Question 2

Which of the following options would you choose?
A: a 20% chance of winning a prize equal to 4 times your monthly income
B: a 25% chance of winning a prize equal to 3 times your monthly income

According to classical economic theory (expected utility), Option A should be chosen in both cases. In each question, A is the riskier option but, because the prize is higher, its overall utility or value is greater than Option B in both questions. (The value of A is about 7% greater than B in both cases.)

However, in experiments, it has been found that the majority of people choose B in Q1 and A in Q2. This phenomenon is known as The Allais Paradox. It is one of several apparent anomalies in our perception of risk, showing that our perception of probability is not linear. When the probability is high, as in Q1, most people go for the safer option but, when the probability is low, as in Q2, we tend to go for the riskier option.