Which of the following evidence does not support the expected utility theory?
A) People assign disproportionately high weights to rare events.
B) Risk-averse people do not engage in fair bets.
C) Risk-loving people do not purchase insurance policies.
D) Risk-neutral people engage in fair bets.

Question

Quizplus · Accepted Answer

This is an example of the "probability weighting" phenomenon, where people often overestimate the likelihood of rare events and assign more weight to them than they should according to probability theory. This goes against the assumption of expected utility theory that individuals make rational decisions based on objective probabilities.

Which of the Following Evidence Does Not Support the Expected