Your third select
list doesn't retain its selected value because it gets repopulated when any select list is changed (including the third one).
I suggest giving the first two lists a class and responding only to lists with that class:
<select id="firstSelection" class="update">
<option value='1'>One</option>
<option value='2'>Two</option>
</select>
<select id="secondSelection" class="update">
<option value='1'>One</option>
<option value='2'>Two</option>
</select>
<select id="thirdSelection"></select>
$('select.update').on('change', function () {
var firstValue = $('#firstSelection').val();
var secondValue = $('#secondSelection').val();
if (firstValue == 1 && secondValue == 2) {
$('#thirdSelection').html('<option>You</option>' +
'<option>Have</option>' +
'<option>Selected</option>' +
'<option>The</option>' +
'<option>Right</option>' +
'<option>Options</option>');
}
});