I'he contrast between problenls 5 and
7 illustrates a phenomenon discovered
by Allais (14), which we have labeled the
certainty effect: a reduction of the probability
of an outcome by a constant factor
has more impact when the outcome was
initially certain than when it was merely
probable. Prospect theory attributes this
effect to the properties of T. It is easy to
verify, by applying the equation of prospect
theory to problems 5 and 7, that
people for whom the value ratio v(30)l
v(45) lies between the weight ratios
~( .20) /~( .25an) d ~( .80) /~(1.0w)il l prefer
A to B and F to E, contrary to expected
utility theory. Prospect theory
does not predict a reversal of preference
for every individual in problems 5 and
7. It only requires that an individual who
has no preference between A and B prefer
F to 6. For group data, the theory
predicts the observed directional shift
of preference between the two problems