You are given a choice between lottery 1 and lottery 2. You are also given a choice between lottery 3 and lottery 4.

Lottery 1:

A sure gain of $240

Lottery 2:

25% chance to gain $1,000 and 75% chance to gain nothing

Lottery 3:

A sure loss of $750

Lottery 4:

A 75% chance to lose $1,000 and a 25% chance of losing nothing

84% of all people prefer lottery 1 over lottery 2, and 87% choose lottery 4 over lottery 3.

a Explain why the choice of lottery 1 over lottery 2 and lottery 4 over lottery 3 contradicts expected utility maximization. (Hint: Compare lottery 1 + lottery 4 to lottery 2 + lottery 3.)

b Can you explain this anomalous behavior?