Free Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone Page A

axioms are wrong, you claim you’ve proved something that’s not proved.’ Allais would bluster, and [UC San Diego economist] Mark Machina would literally stand up and try to defend Allais. Then Allais would turn on Machina.”
    Allais continued his attack in a prickly 1995 paper subtitled “Unceasingly Repeated Errors or Contradictions of Mark Machina.” (“As a matter of fact,” Allais wrote, “I haven’t been able until now to answer Machina’s paper. My time has been entirely used up, on one hand by the task of editing the first printed version of my 1943 work, in view of which I have [been] awarded the 1988 Nobel Prize in Economic Science, with a new and long introduction, and on another hand by the task of publishing an important book on Europe . . . The reader will understand that I cannot accept to spend too much of a scarce time to correct Machina’s mistakes,
line after line
. . .”)
    The long-suffering Machina has posted Allais’s paper on his website, under the heading “News, Gossip & Games.” I’ll confine myself to saying a little about why Allais’ paradox was so intractable. The stumbling block isn’t the certainty effect per se. It’s the way that smart people are influenced by mere words, by the way the choices are framed. As Amos Tversky later wrote, “We choose between descriptions of options, rather than between the options themselves.” For the most part, economists were not ready to accept that fact of life.

Ten
Money Pump

    For a psychologist, Ward Edwards could display startling insensitivity to the feelings of others. Sarah Lichtenstein found him exasperating. Fresh out of Swarthmore, she arrived at Ann Arbor for graduate work, with Edwards as her advisor. Edwards proposed that she collaborate on an article with another grad student, Paul Slovic. “When we had written it up and were talking about the order of names to publish it under, Ward very graciously agreed to be the third name,” Lichtenstein said. “He suggested—it was stronger than that—that Paul be the first author because he, being a man, would have to earn a living.” The article appeared in a 1965 issue of
The American Journal of Psychology
, credited to Paul Slovic, Sarah Lichtenstein, and Ward Edwards. Slovic was three years younger than Lichtenstein.
    The patriarchal times dictated Lichtenstein’s moves after grad school. “I sort of followed hubby around for several years.” Husband Ed was a clinical psychologist who took a job in Los Angeles. When he got an offer from the University of Oregon in 1966, one selling point was that Sarah might be able to land a job at the Oregon Research Institute. “It was a terrific inducement,” she explained. ORI “was a marvelous place to work at that time.”
    Paul Slovic was already there. He had accepted a job after graduation in 1964 and lobbied for ORI to hire Lichtenstein. The two resumed an agreeable collaboration that, among other things, studied how people assign prices to gambles.
    For example: A wager offers a 1 in 8 chance of winning $77. How much would you be willing to pay for the privilege of playing this bet?
    The obvious approach is to compute how much you can expect to win, on the average, each time you play. This comes to ⅛ times $77, or $9.63. Of course, the numbers here make it hard to do the math in your head. The psychologists were interested in intuitive judgments, and they observed that the prices subjects assigned to simple bets were usually too high. People apparently paid more attention to the prize amount than to the chance of winning it.
    This could explain why lotteries are so popular. A lottery offers, let’s say, a one-in-a-zillion chance of winning $58 million. Players are essentially buying the right to fantasize about the jackpot. The “one in a zillion” is in the fine print, literally
and
in the minds of players. When lottery boards want to drum up business, they raise the jackpots, not the chances of winning.
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