Money-Pumps

Abstract

A money-pump is a thought experiment involving a person whose preferences form a circle. Repeatedly, she pays some money to go from one alternative to another that she likes better. When she has paid her way around the full circle she is back at the starting-point, but with less money. Money-pumps have been used to show that certain preference patterns are irrational since they make a person exploitable. Formal tools can be used to analyze money-pumps in a precise manner, distinguish between different types of money-pumps, and investigate decision strategies to avoid their pernicious effects. Although money-pumps are rather contrived constructions, these investigations have practical relevance since there seem to be decision situations in the real world with the same structure.