The reason that $1000 at 90% odds and $900 at 100% odds are used in this example is the expected value is the same in both cases, making the situations 'equivalent'.

A 90% chance of losing $9000 has an expected value of -$8100.

The way I read it is this:

Do you want to be guaranteed you'll lose $900?

Or do you want a 10% chance you'll lose nothing at all, with a 90% chance you'll lose another $100?

So given a choice between being (nearly) totally wiped out, or having the chance of not being wiped out, people take the chance of keeping their cash.

Makes sense to me.

It seems odd to me that this disproves Bernoulli theory "that a person’s willingness to gamble a certain amount of money was a product of how that amount related to his overall wealth".

If I could pull $900-$1000 from my savings with no immediate consequences, I'd be more likely to spend the $900 at 100%. But if loosing $900-$1000 means I'll have to tell my landlord I'll be late with the rent and then finding someone to borrow it from, and paying it back with interest, the extra $100 aren't significantly more crippling - it's the transaction cost of going through all this bother that's problematic - I'll take a 10% chance.

Come to think of it, I actually did something like this: Prior to moving abroad a while ago, I consulted a lawyer to make sure I did everything right to avoid double taxation. That was a taking on a 100% chance of a rather big expense to avoid an unknown chance of an even larger expense.

Yes, I agree. I think 5b is very poorly framed, and doesn't show what it is puported to show in the linked article.

I also agree that the reasoning changes a lot if this is a one-time event vs. a regular occurance.

you mean 10% chance, right?