PROSPECT THEORY 8 to. 2. The following pair of choice problems illustrates the certainty effect with LEM 5 A: 50% chance to win a three- B: A one- week tour of ur of England England, with certainty. [78] PROBLEM 6: lance to win a three- D: 10% chance to win a one week tour of England, week tour of England N=72[67] [33] s not the only type of violation of the substitution axiom hich this axiom fails is illustrated by the following problems. PROBLEM 7 A:(6000,45),B:(3,000,,90) PROBLEM 8 N=66[73] Note that in Problem 7 the probabilities of winning are substantial (.90 and. 45), d most people choose the prospect where winning is more probable. In Problem 8, there is a possibility of winning, although the probabilities of winning are minuscule (.002 and. 001)in both prospects. In this situation where winning is possible but not probable, most people choose the prospect that offers the large gain. Similar results have been reported by MacCrimmon and Larsson[28] The above problems illustrate common attitudes toward risk or chance that nnot be captured by the expected utility model. The results suggest the following empirical generalization concerning the manner in which the substitu- tion axiom is violated If (y, pq) is equivalent to(x, p), then(y, pqr) is preferred to (x, pr),0<p, a, r<1. This property is incorporated into an alternative theory, developed in the second part of the paper.Reproduced with permission of the copyright owner. Further reproduction prohibited without permission