We don't act irrationally when choosing 1A and 2B; rather expected utility theory is not robust enough to capture such " bounded rationality " choices that in this case arise because of complementarities.
32.
It is assumed that through a fear appeal the perception of threatening stimuli creates subjective expected utility theory, the protection motivation theory, the health belief model, the theory of reasoned action, and the transtheoretical model.
33.
Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays cumulative prospect theory, a rank-dependent development of prospect theory, introduced in 1992 by Daniel Kahneman and Amos Tversky.
34.
The inconsistency stems from the fact that in expected utility theory, equal outcomes added to each of the two choices should have no effect on the relative desirability of one gamble over the other; equal outcomes should " cancel out ".
35.
Such a procedure has been used in the contract theory framework to several typical situations, labeled " moral hazard ", " adverse selection " and " von Neumann Morgenstern utility functions, as stated by expected utility theory.
36.
Beginning in 1979 with the publication of the prospect theory of Daniel Kahneman and Amos Tversky, a range of generalized expected utility models were developed with the aim of resolving the Allais and Ellsberg paradoxes, while maintaining many of the attractive properties of expected utility theory.
37.
The conventional alternative is expected utility theory which says bets should be sized to expected utility of the outcome ( to an individual with logarithmic utility, the Kelly bet maximizes expected utility, so there is no conflict; moreover, Kelly's original paper clearly states the need for a utility function in the case of gambling games which are played finitely many times
38.
The expected utility model developed by John von Neumann and Oskar Morgenstern dominated decision theory from its formulation in 1944 until the late 1970s, not only as a prescriptive, but also as a descriptive model, despite powerful criticism from Maurice Allais and Daniel Ellsberg who showed that, in certain choice problems, decisions were usually inconsistent with the axioms of expected utility theory.
