This article describes a modification of the Allais paradox that induces preferences inconsistent with two conditions weaker than the independence axiom, namely
quasi-convexity (a special case of which is the
betweenness axom), and
Hypothesis II of Machina (also called
fanning-out). These violations can be formally derived from prospect theory by invoking a nonliner transformation of probability into decision weight.
Key words nonexpected utility - quasi-convexity - Machina's Hypothesis II - pseudo-endowment
I would like to thank David Bell, Vijay Krishna, John Pratt, and especially Colin Camerer for helpful comments and criticism.