The Allais Paradox: What It Became, What It Really Was, What It Now Suggests to Us

Abstract

Whereas many others have scrutinized Allais paradox from a theoretical angle, we study paradox from an historical perspective and link our findings to a suggestion as to how decision theory could make use of it today. We emphasize that Allais proposed paradox as a normative argument, concerned with the rational man and not real man, to use his words. Moreover, and more subtly, we argue that Allais had an unusual sense of normative, being concerned not so much with rationality of choices as with rationality of agent as a person. These two claims are buttressed by a detailed investigation – first of its kind – of 1952 Paris conference on risk, which set context for invention of paradox, and a detailed reconstruction – also first of its kind – of Allais's specific normative argument from his numerous but allusive writings. The paper contrasts these interpretations of what paradox historically represented, with how it generally came to function within decision theory from late 1970s onwards: that is, as an empirical refutation of expected utility hypothesis, and more specifically of condition of von Neumann-Morgenstern independence that underlies that hypothesis. While not denying that this use of paradox was fruitful in many ways, we propose another use that turns out also to be compatible with an experimental perspective. Following Allais's hints on the experimental definition of rationality, this new use consists in letting experiment itself speak of rationality or otherwise of subjects. In 1970s, a short sequence of papers inspired by Allais implemented original ways of eliciting reasons guiding subjects' choices, and claimed to be able to draw relevant normative consequences from this information. We end by reviewing this forgotten experimental avenue not simply historically, but with a view to recommending it for possible use by decision theorists today.