The Allais Paradox: What It Became, What It Really Was, What It Now Suggests to Us

HEC Paris Research Paper No. ECO/SCD-2018-1299

Economics and Philosophy, forthcoming

55 Pages Posted: 4 Aug 2018 Last revised: 14 Sep 2018

See all articles by Philippe Mongin

Philippe Mongin

GREGHEC; CNRS & HEC Paris - Economics & Decision Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2018

Abstract

Whereas many others have scrutinized the Allais paradox from a theoretical angle, we study the paradox from an historical perspective and link our findings to a suggestion as to how decision theory could make use of it today. We emphasize that Allais proposed the paradox as a normative argument, concerned with "the rational man" and not the "real man", to use his words. Moreover, and more subtly, we argue that Allais had an unusual sense of the normative, being concerned not so much with the rationality of choices as with the rationality of the agent as a person. These two claims are buttressed by a detailed investigation – the first of its kind – of the 1952 Paris conference on risk, which set the context for the invention of the paradox, and a detailed reconstruction – also the first of its kind – of Allais's specific normative argument from his numerous but allusive writings. The paper contrasts these interpretations of what the paradox historically represented, with how it generally came to function within decision theory from the late 1970s onwards: that is, as an empirical refutation of the expected utility hypothesis, and more specifically of the condition of von Neumann-Morgenstern independence that underlies that hypothesis. While not denying that this use of the paradox was fruitful in many ways, we propose another use that turns out also to be compatible with an experimental perspective. Following Allais's hints on "the experimental definition of rationality", this new use consists in letting the experiment itself speak of the rationality or otherwise of the subjects. In the 1970s, a short sequence of papers inspired by Allais implemented original ways of eliciting the reasons guiding the subjects' choices, and claimed to be able to draw relevant normative consequences from this information. We end by reviewing this forgotten experimental avenue not simply historically, but with a view to recommending it for possible use by decision theorists today.

Keywords: Allais Paradox, Decision Theory, Expected Utility Theory, Experimental Economics, Positive vs Normative, Rationality, 1952 Paris Conference, Allais, Von Neumann and Morgenstern, Samuelson, Savage

JEL Classification: B21, B31, B41, C91, D8

Suggested Citation

Mongin, Philippe, The Allais Paradox: What It Became, What It Really Was, What It Now Suggests to Us (June 1, 2018). HEC Paris Research Paper No. ECO/SCD-2018-1299. Available at SSRN: https://ssrn.com/abstract=3214506 or http://dx.doi.org/10.2139/ssrn.3214506

Philippe Mongin (Contact Author)

GREGHEC ( email )

1 rue de la Libération
Jouy-en-Josas, 78350
France

CNRS & HEC Paris - Economics & Decision Sciences ( email )

Paris
France

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