Dynamics of Choice Behavior: The Logical Relation between Linear Objective Probability and Nonlinear Subjective Probability

Abstract

In choice behavior, researchers have noticed that humans have a preference for some probabilities, Most researchers in the past 40 yr. have been unable to account for the nonlinearity of this behavior. The convex shape of nonlinear subjective probabilities has been experimentally confirmed by every investigator from Preston and Baratta through Edwards, Handa, and Kahneman and Tversky. What has been lacking is a clear analysis of why the probabilities have a convex shape. Here, it is argued that Keynes provided a logical explanation and a mathematical formula for this phenomenon in 1921. Had researchers not overlooked this important work, the body of knowledge on choice behavior might be more advanced.