2 ERRORS IN THE ALLAIS IMPOSSIBILITY THEOREM

In his so-called 'Allais Impossibility Theorem', Allais (1988) asserts that the technique of 'generalized expected utility analysis' from Ma china (1982) is invalid, on the grounds that its key tool, the 'local utility function', cannot be well-defined for preferences over finite- outcome lotteries. This paper presents a brief description of the loca l utility function and a summary of Allais' argument, and points out t wo separate errors in the latter. The first error consists of believin g that two local utility functions should be affinely equivalent even when their outcome variables differ by a nonlinear transformation. The second error consists of an incorrect derivation of the local utility function, resulting from extending a moment representation function b eyond its valid domain, and/or invoking the chain rule at a point wher e this function is not differentiable.