The Undoing Project: A Friendship that Changed the World (181 POCHE)

by Michael Lewis

People felt greater pleasure going from 0 to $1 million than they felt going from $1 million to $2 million. Of course, expected utility theory also predicted that people would take a sure gain over a bet that offered an expected value of an even bigger gain. They were “risk averse.” But what was this thing that everyone had been calling “risk aversion?” It amounted to a fee that people paid, willingly, to avoid regret: a regret premium. Expected utility theory wasn’t exactly wrong. It simply did not understand itself, to the point where it could not defend itself against seeming contradictions. The theory’s failure to explain people’s decisions, Danny and Amos wrote, “merely demonstrates what should perhaps be obvious, that non-monetary consequences of decisions cannot be neglected, as they all too often are, in applications of utility theory.”