The Allais Paradox

[I]f we don’t make decisions based upon a complete set of information, then what are our decisions based upon? Which factors were actually affecting our choices? Kahneman and Tversky realized that people thought about alternative outcomes in terms of gains or losses, and not in terms of states of wealth. The gambler playing poker is only concerned with the chips right in front of him, and the possibility of winning (or losing) that specific amount of money. (The brain is a bounded machine, and can’t think about everything at once.) This simple insight led Kahneman and Tversky to start revising the format of their experiments. At the time, they regarded this as nothing but a technical adjustment, a way of making their questionnaires more psychologically realistic.