individual make a decision?)

8.25. Ellsberg Paradox A barrel contains a mixture of 90 red, blue, and yellow

balls. Thirty of the balls are red, and the remaining 60 are a mixture of

blue or yellow, but the proportion of blue and yellow is unknown. A sin-

gle ball will be taken randomly from the barrel.

a. Suppose you are offered the choice between gambles A and B

A: Win $1,000 if a red ball is chosen.

B: Win $1,000 if a blue ball is chosen.

Would you prefer A or B? Why?

b. Now suppose that you are offered a choice between gambles C and D.

C: Win $1,000 if either a red or a yellow ball is chosen.

D: Win $1,000 if either a blue or a yellow ball is chosen.

Would you prefer C or D? Why?

c. Many people prefer A in the first choice and D in the second. Do

you think this is inconsistent? Explain.