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

The expected utility theory assumes that people make decisions based on the expected utility, or the expected level of satisfaction or happiness, associated with each possible outcome. However, research has shown that people tend to assign disproportionately high weights to rare events, which can lead to decisions that are inconsistent with expected utility theory. This phenomenon is known as the "rarity effect" and is a violation of the theory. Therefore, choice A does not support the expected utility theory.

Which of the Following Evidence Does NOT Support the Expected