Human Attitude toward Risk: Simultaneous Testing of ‘Allais Paradox’ and Risk Aversion

Muhammad Mazhar Iqbal

Abstract

In real life, human attitudes toward risk are mixed. However, 
economists have been using risk aversion as rational behavior in economic 
modeling ever since. The Expected Utility Hypothesis (EUH), which assumes
risk-averse behavior but can also be used for risk-loving attitudes, comes into 
common use. Allais discovered a systematic violation of the EUH known as
the ‘Allais paradox’, which initially discredited the EUH a great deal but was
accepted, later on, as an exception to the EUH. A possible reason for ignoring
the ‘Allais paradox’ could be that Allais himself and many studies which 
followed tested the EUH without reflecting risk aversion in particular. 
Therefore, this study tests the EUH and risk aversion simultaneously. The 
results are interesting. The greatest number of respondents verified the EUH 
based on risk aversion, but a majority of them showed a mixed attitude. This 
result, therefore, highlights the need for economic theorizing on the 
assumption of risk-loving and mixed attitudes as well.