264 D. KAHNEMAN AND A. TVERSKY That is, the overall utility of a prospect, denoted by U, is the expected utility of ii)Asset Integration: (x1, Pi;...; tm, pn)is acceptable at asset position w iff U(w +x1, Pi That is, a prospect is acceptable if the utility resulting from integrating the prospect with one's assets exceeds the utility of those assets alone. Thus, the main of the utility function is final states (which include one's asset position) ather than gains or losses. Although the domain of the utility function is not limited to any particular class of consequences, most applications of the theory have been concerned with monetary outcomes. Furthermore, most economic applications introduce the following additional assumption iii)Risk Aversion: u is concave(u"<O). <s person is risk averse if he prefers the certain prospect(x)to any risky prospect xpected value x. In expected utility theory, risk aversion is equivalent to the concavity of the utility function. The prevalence of risk aversion is perhaps the best known generalization regarding risky choices. It led the early decisi theorists of the eighteenth century to propose that utility is a concave function of money, and this idea has been retained in modern treatments(Pratt [33, Arrow In the following sections we demonstrate several phenomena these tenets of expected utility theory. The demonstrations are niversity faculty to hypothetical choice espondents were presented with problems of the type illustrate thich of the following would you prefer? A: 50% chance to win 1.000 B: 450 for sure 50% chance to win nothing The outcomes refer to Israeli currency. To appreciate the significance of the ote that the median net monthly income for a family is about 3,000Isr The respondents were asked to imagine that they were actually faced with the choice described in the problem, and to indicate the decision they would have made in such a case. The responses were anonymous and the instructions specified that there was no'correct'answer to such problems, nd that the aim of the study was to find out how people choose among risky prospects. The problems were presented in questionnaire form, with at most ozen problems per booklet. Several forms of each questionnaire were con- ructed so that subjects were exposed to the problems in different orders. In addition, two versions of each problem were used in which the left-right position s reversed he problems described in this paper are selected illustrations of a series of effects. Every effect has been observed in several problems with differen outcomes and probabilities. Some of the problems have also been presented to groups of students and faculty at the University of Stockholm and at theReproduced with permission of the copyright owner. Further reproduction prohibited without permission