Decision theory seems to offer a very attractive normative framework for individual and social choice under uncertainty. The decisionmaker should think of her choice situation, at any given moment, in terms of a set of possible outcomes, that is, specifications of the possible consequences of choice, described in light of the decisionmaker's goals; a set of possible actions; and a "state set" consisting of possible prior "states of the world." It is this framework for choice which provides the foundation for (...) expected utility theory, as demonstrated in the work of Leonard Savage. Problems arise, however, when the decisionmaker is boundedly rational: when the mental process of thinking about outcomes, actions, and states is itself expensive and time consuming. In the case of the unboundedly rational decisionmaker, decision theory enjoins her to employ maximally specific outcomes; to consider all possible actions; and to use a set of mutually exclusive and collective exhaustive states, each of which is sufficiently finely specified so that each action, together with each state, yields one and only one maximally specific outcome. In the case of the boundedly rational decisionmaker, this procedure is either infeasible or, if feasible, irrational. This paper presents the problem of bounded rationality. It surveys possible solutions, none of which are found to be attractive. And it concludes by discussing the difficulties that the problem of bounded rationality poses for the welfarist program for legal scholarship presented by Louis Kaplow and Steven Shavell in their book, Fairness versus Welfare. (shrink)

Behavioral science has long been puzzled by the experience of temptation, the resulting impulsiveness, and the variably successful control of this impulsiveness. In conventional theories, a governing faculty like the ego evaluates future choices consistently over time, discounting their value for delay exponentially, that is, by a constant rate; impulses arise when this ego is confronted by a conditioned appetite. Breakdown of Will (Ainslie 2001) presents evidence that contradicts this model. Both people and nonhuman animals spontaneously discount the value of (...) expected events in a curve where value is divided approximately by expected delay, a hyperbolic form that is more bowed than the rational, exponential curve. With hyperbolic discounting, options that pay off quickly will be temporarily preferred to richer but slower-paying alternatives, a phenomenon that, over periods from minutes to days, can account for impulsive behaviors, and over periods of fractional seconds can account for involuntary behaviors. Contradictory reward-getting processes can in effect bargain with each other, and stable preferences can be established by the perception of recurrent choices as test cases (precedents) in recurrent intertemporal prisoner's dilemmas. The resulting motivational pattern resembles traditional descriptions of the will, as well as of compulsive phenomena that can now be seen as side-effects of will: over-concern with precedent, intractable but circumscribed failures of self-control, a motivated (“dynamic”) unconscious, and an inability to exploit emotional rewards. Hyperbolic curves also suggest a means of reducing classical conditioning to motivated choice, the last necessary step for modeling many involuntary processes like emotion and appetite as reward-seeking behaviors; such modeling, in turn, provides a rationale for empathic reward and the “construction” of reality. Key Words: altruism; appetite; behavioral economics; classical conditioning; compulsions; dynamic inconsistency; emotions; empathy; freedom of will; hyperbolic discounting; impulsiveness; intertemporal bargaining; self-control; social construction; volition; weakness of will. (shrink)

The tension between rule and judgment is well known with respect to the meaning of substantive legal commands. The same conflict is present in fact finding. The law penetrates to virtually all aspects of human affairs; irtually any interaction can generate a legal conflict. Accurate fact finding about such disputes is a necessary condition for the appropriate application of substantive legal commands. Without accuracy in fact finding, the law is unpredictable, and thus individuals cannot efficiently accommodate their affairs to its (...) commands. The need for accuracy and predictability in legal fact finding has generated a search for formal tools to apply to the task. Among the tools that have been examined are Bayes' Theorem and expected utility theory (Bayesian or statistical decision theory). These tools do not map well onto trials, which in turn has generated an examination of alternative approaches, in particular the story model and the relative plausibility theory. This paper discusses these issues in turn. It elaborates the basic structure of trials in the American tradition; examines the uneasy relationship between trials and such formalisms as Bayes' Theorem and expected utility theory; and introduces the relative plausibility theory as an explanation of the nature of juridical proof. (shrink)

Daniel Ellsberg presented in Ellsberg (The Quarterly Journal of Economics 75:643–669, 1961) various examples questioning the thesis that decision making under uncertainty can be reduced to decision making under risk. These examples constitute one of the main challenges to the received view on the foundations of decision theory offered by Leonard Savage in Savage (1972). Craig Fox and Amos Tversky have, nevertheless, offered an indirect defense of Savage. They provided in Fox and Tversky (1995) an explanation of Ellsberg’s two-color problem (...) in terms of a psychological effect: ambiguity aversion . The ‘comparative ignorance’ hypothesis articulates how this effect works and explains why it is important to an understanding of the typical pattern of responses associated with Ellsberg’s two-color problem. In the first part of this article we challenge Fox and Tversky’s explanation. We present first an experiment that extends Ellsberg’s two-color problem where certain predictions of the comparative ignorance hypothesis are not confirmed. In addition the hypothesis seems unable to explain how the subjects resolve trade-offs between security and expected pay-off when vagueness is present. Ellsberg offered an explanation of the typical behavior elicited by his examples in terms of these trade-offs and in section three we offer a model of Ellsberg’s trade-offs. The model takes seriously the role of imprecise probabilities in explaining Ellsberg’s phenomenon. The so-called three-color problem was also considered in Fox and Tversky (1995). We argue that Fox and Tversky’s analysis of this case breaks a symmetry with their analysis of the two-color problem. We propose a unified treatment of both problems and we present a experiment that confirms our hypothesis. (shrink)

The disjunction effect (Tversky & Shafir, 1992) occurs when decision makers prefer option x (versus y) when knowing that event A occurs and also when knowing that event A does not occur, but they refuse x (or prefer y) when not knowing whether or not A occurs. This form of incoherence violates Savage's (1954) sure-thing principle, one of the basic axioms of the rational theory of decision making. The phenomenon was attributed to a lack of clear reasons for accepting an (...) option (x) when subjects are under uncertainty. Through a pragmatic analysis of the task and a consequent reformulation of it, we show that the effect does not depend on the presence of uncertainty, but on the introduction of non-relevant goals into the text problem, in both the well-known Gamble problem and the Hawaii problem. (shrink)

One reason why humans don't behave according to standard game theoretical rationality is because it's not realistic to assume that everyone else is behaving rationally. An individual is expected to have psychological mechanisms that function to maximize his/her long-term payoffs in a world of potentially “irrational” individuals. Psychological decision theory has to be individualistic because individuals make decisions, not groups.

Decision theory, understood as providing a normative account of rationality in action, is often thought to be an adequate formalization of instrumental reasoning. As a model, there is much to be said for it. However, if decision theory is to adequately account for correct instrumental reasoning, then the axiomatic conditions by which it links preference to action must be normative for choice. That is, a choice must be rationally defective unless it proceeds from a preference set that satisfies the axiomatic (...) conditions. -/- The crucial feature of standard decision theory for present purposes is that it conceives rational action as maximizing, as doing the best that one can in terms of satisfying one’s preferences. For maximizing to be possible, the preference set in question must completely order a person’s options. But I have argued elsewhere that that condition is often unmet by actual preference sets, so maximizing is not always available. Given that it is not, satisficing deserves attention, both as the most important alternative to maximizing and for the lessons it can yield with respect to goal-directed action. With those lessons in hand, standard maximizing decision theory is reconsidered, with the aim of showing that it does not adequately represent the normative distinction between means and ends. (shrink)

Two views of game theory are discussed: (1) game theory as a description of the behavior of rational individuals who recognize each other’s rationality and reasoning abilities, and (2) game theory as an internally consistent recommendation to individuals on how to act in interactive situations. It is shown that the same mathematical tool, namely modal logic, can be used to explicitly model both views.

Does conscious reflection lead to good decision-making? Whereas engaging in reflection is traditionally thought to be the best way to make wise choices, recent psychological evidence undermines the role of reflection in lay and expert judgement. The literature suggests that thinking about reasons does not improve the choices people make, and that experts do not engage in reflection, but base their judgements on intuition, often shaped by extensive previous experience. Can we square the traditional accounts of wisdom with the results (...) of these empirical studies? Should we even attempt to? I shall defend the view that philosophy and cognitive sciences genuinely interact in tackling questions such as whether reflection leads to making wise choices. (shrink)

Our aim in this paper was to establish an empirical evaluation for similarity effects modeled by Rubinstein; Azipurua et al.; Leland; and Sileo. These tests are conducted through a sensitivity analysis of two well-known examples of expected utility (EU) independence violations. We found that subjective similarity reported by respondents was explained very well by objective measures suggested in the similarity literature. The empirical results of this analysis also show that: (1) the likelihood of selection for the riskier choice increases as (...) the pair becomes more similar, (2) these choice patterns are consistent with well-known independence violations of expected utility, and (3) a significant proportion of individuals exhibit intransitive choice patterns predicted under similarity effects, but not allowed under generalized expected utility models for risky choice. (shrink)

In this paper I discuss the problem of providing an account of the normative force of theories of rationality. The theories considered are theories of rational inference, rational belief and rational decision— logic, probability theory and decision theory, respectively. I provide a naturalistic account of the normativity of these theories that is not viciously circular. The account offered does have its limitations though: it delivers a defeasible account of rationality. On this view, theories of rational inference, belief and decision are (...) not a priori . Rather, they are a posteriori and may change over time. Finally, I compare this approach with another that emerges from the Ramsey-Lewis approach to defining theoretical terms. (shrink)

The results generated by experimentalists in psychology and economics haveled to numerous advances in the study of human decision making under risk.Camerer (1995) and Rabin (1998) provide excellent reviews of the relevantliterature. These results clearly display the gap between normative theoriesof ideal behavior and descriptive theories of observed behavior. The mostprominent result is loss aversion – the observation that a loss is given greatervalue than a gain of an equal size – and the resulting S-shaped utility function.Rabin puts the key (...) point as follows: ``Researchers have identified a pervasive feature of reference dependence: In a wide variety of domains, people are significantly more averse to losses than they are attracted to same size gains''(Rabin 1998, 13–14). In what follows, I will show that the ``wide variety of domains'' is wide indeed. In particular, I will review the effects of the S-shaped utility function on the resolution of the decision to commit a crime, to decision to violate professional ethics, and the decision to participate in a rebellion. (shrink)

The present note first discusses the concept of s-convex pain functions in decision theory. Then, the economic behavior of an agent with such a pain function is represented through the comparison of some recursive lotteries.

There is a surprising disconnect between formal rational choice theory and philosophical work on reasons. The one is silent on the role of reasons in rational choices, the other rarely engages with the formal models of decision problems used by social scientists. To bridge this gap, we propose a new, reason-based theory of rational choice. At its core is an account of preference formation, according to which an agent’s preferences are determined by his or her motivating reasons, together with a (...) ‘weighing relation’ between different combinations of reasons. By explaining how someone’s preferences may vary with changes in his or her motivating reasons, our theory illuminates the relationship between deliberation about reasons and rational choices. Although primarily positive, the theory can also help us think about how those preferences and choices ought to respond to normative reasons. (shrink)

This text is a non-technical overview of modern decision theory. It is intended for university students with no previous acquaintance with the subject, and was primarily written for the participants of a course on risk analysis at Uppsala University in 1994.

This collection brings together the essays of one of the foremost American philosophers of economics. Cumulatively they offer fresh perspectives on foundational questions such as: what sort of science is economics? and how successful can economists be in acquiring knowledge of their subject matter?

Ellsberg (The Quarterly Journal of Economics 75, 643–669 (1961); Risk, Ambiguity and Decision, Garland Publishing (2001)) argued that uncertainty is not reducible to risk. At the center of Ellsberg’s argument lies a thought experiment that has come to be known as the three-color example. It has been observed that a significant number of sophisticated decision makers violate the requirements of subjective expected utility theory when they are confronted with Ellsberg’s three-color example. More generally, such decision makers are in conflict with (...) either the ordering assumption or the independence assumption of subjective expected utility theory. While a clear majority of the theoretical responses to these violations have advocated maintaining ordering while relaxing independence, a persistent minority has advocated abandoning the ordering assumption. The purpose of this paper is to consider a similar dilemma that exists within the context of multiattribute models, where it arises by considering indeterminacy in the weighting of attributes rather than indeterminacy in the determination of probabilities as in Ellsberg’s example. (shrink)

This volume collects four published articles by the late Tamara Horowitz and two unpublished papers on decision theory: "Making Rational Decisions When Preferences Cycle" and the monograph-length "The Backtracking Fallacy." An introduction is provided by editor Joseph Camp. Horowitz preferred to recognize the diversity of rationality, both practical and theoretical rationality. She resisted the temptation to accept simple theories of rationality that are quick to characterize ordinary reasoning as fallacious. This broadly humanist approach to philosophy is exemplified by the articles (...) in this collection. As just one example, in "The Backtracking Fallacy," she argues that there are policies for decision-making a person may adopt if the person prefers to do so, but need not adopt. A person who employs such a policy no longer can regard standard expected utility theory as exceptionless, thereby sacrificing theoretical simplicity. But it is a mistake, Horowitz argues, to preserve theoretical simplicity by falsifying the decision making methods real people really use. (shrink)

This paper reports an experiment which investigates a possible cognitive antecedent of event-splitting effects (ESEs) experimentally observed by Starmer and Sugden (1993) and Humphrey (1995) – the learning of absolute frequency of event category impacting on the learning of probability of event category – and reveals some evidence that it is responsible for observed ESEs. It is also suggested and empirically substantiated that stripped-down prospect theory will accurately predict ESEs in some decision making tasks, but will not perform well in (...) others. This contention, it is argued, is indicative of fundamental descriptive shortcomings in the economic conception of choice under uncertainty and may entail implications beyond the direct concerns of this paper. (shrink)

Many decisions involve multiple stages of choices and events, and these decisions can be represented graphically as decision trees. Optimal decision strategies for decision trees are commonly determined by a backward induction analysis that demands adherence to three fundamental consistency principles: dynamic, consequential, and strategic. Previous research (Busemeyer et al. 2000, J. Exp. Psychol. Gen. 129, 530) found that decision-makers tend to exhibit violations of dynamic and strategic consistency at rates significantly higher than choice inconsistency across various levels of potential (...) reward. The current research extends these findings under new conditions; specifically, it explores the extent to which these principles are violated as a function of the planning horizon length of the decision tree. Results from two experiments suggest that dynamic inconsistency increases as tree length increases; these results are explained within a dynamic approach–avoidance framework. (shrink)

In this article the theoretic evolution and the empirical-experimental efforts that have led to the affirmation of the bounded/procedural rationality paradigm are discussed. Moreover, the debate on supporters of the "optimization" approach and supporters of the "bounded/procedural rationality" approach is traced, highlighting the irreconcilability of these two approaches and, in retort, a solid defense against a merely "reductionist" attempt of the innovative context of the Simonian theory. Critically going over the debate on decision dynamics, it becomes clear how, due to (...) the uncertain nature of rational processes, it is impossible to establish the decision-making best way. The imperfect character of individual choice is explained by how the decider identifies a solution that appears satisfying in that moment due to cognitive and temporal limits. (shrink)

Representation theorems are often taken to provide the foundations for decision theory. First, they are taken to characterize degrees of belief and utilities. Second, they are taken to justify two fundamental rules of rationality: that we should have probabilistic degrees of belief and that we should act as expected utility maximizers. We argue that representation theorems cannot serve either of these foundational purposes, and that recent attempts to defend the foundational importance of representation theorems are unsuccessful. As a result, we (...) should reject these claims, and lay the foundations of decision theory on firmer ground. (shrink)

A rule for the acceptance of scientific hypotheses called 'the principle of cost-benefit dominance' is shown to be more effective and efficient than the well-known principle of the maximization of expected (epistemic) utility. Harvey's defense of his theory of the circulation of blood in animals is examined as a historical paradigm case of a successful defense of a scientific hypothesis and as an implicit application of the cost-benefit dominance rule advocated here. Finally, various concepts of 'dominance' are considered by (...) means of which the effectiveness of our rule may be increased. (shrink)

The classical theory of preference among monetary bets represents people as expected utility maximizers with concave utility functions. Critics of this account often rely on assumptions about preferences over wide ranges of total wealth. We derive a prediction of the theory that bears on bets at any fixed level of wealth, and test the prediction behaviorally. Our results are discrepant with the classical account. Competing theories are also examined in light of our data.

In this paper I examine Don Ross’s application of unificationism as a methodological criterion of theory appraisal in economics and cognitive science. Against Ross’s critique that explanations of the preference reversal phenomenon by the ‘heuristics and biases’ programme is ad hoc or ‘Ptolemaic’, I argue that the compatibility hypothesis, one of the explanations offerd by this programme, is theoretically and empirically well-motivated. A careful examination of this hypothesis suggests several strengths of a procedural approach to modelling cognitive processes underlying individual (...) decision making, compared to a multiple-agent approach which Ross promotes. I argue that the debate between economists and psychologists are both theoretical and empirical, but cannot be resolved by appealing to the ideal of unification. (shrink)

The “exchange paradox”—also referred to in the literature by a variety of other names, notably the “two-envelopes problem”—is notoriously difficult, and experts are not all agreed as to its resolution. Some of the various expressions of the problem are open to more than one interpretation; some are stated in such a way that assumptions are required in order to fill in missing information that is essential to any resolution. In three experiments several versions of the problem were used, in each (...) of which the information given was sufficient to determine an optimal choice strategy when it exists or to justify indifference regarding keeping or trading when such a strategy does not exist. College students who were presented with the various versions of the problem tended to base their choices on simple heuristics and to give little evidence of understanding the probabilistic implications of the differences in the problem statements. (shrink)

The classical theory of preference among monetary bets represents people as expected utility maximizers with concave utility functions. Critics of this account often rely on assumptions about preferences over wide ranges of total wealth. We derive a prediction of the theory that bears on bets at any fixed level of wealth, and test the prediction behaviorally. Our results are discrepant with the classical account. Competing theories are also examined in light of our data.

The objective of this paper is to construct an implementable theory of rational decision-making for cognitive agents subject to realistic resource constraints. It is argued that decision-making should select actions indirectly by selecting plans that prescribe them. It is also argued that although expected values provide the tool for evaluating plans, plans cannot be compared straightforwardly in terms of their expected values, and the objective of a realistic agent cannot be to find optimal plans. The theory of Locally Global planning (...) is proposed as a realistic alternative to standard "maximizing" theories of rational decision-making. (shrink)

The objective of this book is to produce a theory of rational decision making for realistically resource-bounded agents. My interest is not in “What should I do if I were an ideal agent?”, but rather, “What should I do given that I am who I am, with all my actual cognitive limitations?” The book has three parts. Part One addresses the question of where the values come from that agents use in rational decision making. The most comon view among philosophers (...) is that they are based on preferences, but I argue that this is computationally impossible. I propose an alternative theory somewhat reminiscent of Bentham, and explore how human beings actually arrive at values and how they use them in decision making. Part Two investigates the knowledge of probability that is required for decision-theoretic reasoning. I argue that subjective probability makes no sense as applied to realistic agents. I sketch a theory of objective probability to put in its place. Then I use that to define a variety of causal probability and argue that this is the kind of probability presupposed by rational decision making. So what is to be defended is a variety of causal decision theory. Part Three explores how these values and probabilities are to be used in decision making. In chapter eight, it is argued first that actions cannot be evaluated in terms of their expected values as ordinarily defined, because that does not take account of the fact that a cognizer may be unable to perform an action, and may even be unable to try to perform it. An alternative notion of “expected utility” is defined to be used in place of expected values. In chapter nine it is argued that individual actions cannot be the proper objects of decision-theoretic evaluation. We must instead choose plans, and select actions indirectly on the grounds that they are prescribed by the plans we adopt. However, our objective cannot be to find plans with maximal expected utilities. Plans cannot be meaningfully compared in that way.. (shrink)

This paper investigates decision-theoretic planning in sophisticated autonomous agents operating in environments of real-world complexity. An example might be a planetary rover exploring a largely unknown planet. It is argued th a t existing algorithms for decision-theoretic planning are based on a logically incorrect theory of rational decision making. Plans cannot be evaluated directly in terms of their expected values, because plans can be of different scopes, and they can interact with other previously adopted plans. Furthermore, in the real world, (...) the search for optimal plans is completely intractable. An alternative theory of rational decision making is proposed, called “locally global planning”. (shrink)

Almost anyone seriously interested in decision theory will name John von Neumann's (1928) Minimax Theorem as its foundation, whereas Utility and Rationality are imagined to be the twin towers on which the theory rests. Yet, experimental results and real-life observations seldom support that expectation. Over two centuries ago, Hume (1739–40/1978) put his finger on the discrepancy. “Reason,” he wrote “is, and ought to be the slave of passions, and can never pretend to any other office than to serve and obey (...) them.” In other words, effective means to reach specific goals can be prescribed, but not the goals. A wide range of experimental results and daily life behavior support this dictum. (shrink)

Game theory is a branch of economics that uses powerful mathematical models to predict what agents ought to do when interacting with other agents strategically. Bounded rationality is a sub-field of game theory that sets out to explain why, in some interesting cases, people don't act according their utility maximizing strategies, as described by game theory. Interactive Epistemology is formal tool used by Game Theorists and computer scientists to model interactive cases of knowledge. This interesting and useful tool has been (...) previously ignored by philosophers. I'd like to introduce philosophers to interactive epistemology. After doing so, I'll go on to describe the way I've used this powerful formal tool in my own research, by giving some arguments about Bounded Epistemology, which is an analogue of Bounded Rationality, and, if I'm right, is explainable according to many, but not all, of the same models. Doing so, however, requires first setting out and explaining many of these concepts more fully. (shrink)

The hypothesis that human reasoning and decision-making can be roughly modeled by Expected Utility Theory has been at the core of decision science. Accumulating evidence has led researchers to modify the hypothesis. One of the latest additions to the field is Dual Process theory, which attempts to explain variance between participants and tasks when it comes to deviations from Expected Utility Theory. It is argued that Dual Process theories at this point cannot replace previous theories, since they, among other things, (...) lack a firm conceptual framework, and have no means of producing independent evidence for their case. (shrink)

The "traditional" view of normative decision theory, as reported (for example) in chapter 2 of Luce and RaiÃa's [1957] classic work, Games and Decisions, proposes a reduction of sequential decisions problems to non-sequential decisions: a reduction of extensive forms to normal forms. Nonetheless, this reduction is not without its critics, both from inside and outside expected utility theory, It islay purpose in this essay to join with those critics by advocating the following thesis.

In its classical conception, game theory aspires to be a determinate decision theory for games, understood as elements of a structurally specified domain. Its aim is to determine for each game in the domain a complete solution to each player's decision problem, a solution valid for all real-world instantiations, regardless of context. “Permissiveness” would constrain the theory to designate as admissible for a player any conjecture consistent with the solution function's designation of admissible strategies for the other players. Given permissiveness (...) and other appropriate constraints, solution sets must contain only Nash equilibria and at least one pure-strategy equilibrium, and there is no solution to games in which no symmetry invariant set of pure-strategy equilibria forms a Cartesian product. These results imply that the classical program is unrealizable. Moreover, the program is implicitly committed to permissiveness, through its common-knowledge assumptions and its commitment to equilibrium. The resulting incoherence deeply undermines the classical conception in a way that consolidates a long series of contextualist criticisms. (shrink)

Ex ante predicted outcomes should be interpreted as counterfactuals (potential histories), with errors as the spread between outcomes. But error rates have error rates. We reapply measurements of uncertainty about the estimation errors of the estimation errors of an estimation treated as branching counterfactuals. Such recursions of epistemic uncertainty have markedly different distributial properties from conventional sampling error, and lead to fatter tails in the projections than in past realizations. Counterfactuals of error rates always lead to fat tails, regardless of (...) the probability distribution used. A mere .01% branching error rate about the STD (itself an error rate), and .01% branching error rate about that error rate, etc. (recursing all the way) results in explosive (and infinite) moments higher than 1. Missing any degree of regress leads to the underestimation of small probabilities and concave payoffs (a standard example of which is Fukushima). The paper states the conditions under which higher order rates of uncertainty (expressed in spreads of counterfactuals) alters the shapes the of final distribution and shows which a priori beliefs about conterfactuals are needed to accept the reliability of conventional probabilistic methods (thin tails or mildly fat tails). (shrink)

Stuart Rachels and Larry Temkin have offered a purported counter-example to the acyclicity of the relationship 'all things considered better than'. This example invokes our intuitive preferences over pairs of alternatives involving a single person's painful experiences of varying intensity and duration. These preferences, Rachels and Temkin claim, are confidently held, entirely reasonable, and cyclical. They conclude that we should drop acyclicity as a requirement of rationality. I argue that, together with the findings of recent research on the way people (...) evaluate episodes of pain, the use of a heuristic known as similarity-based decision-making explains why our intuitive preferences may violate acyclicity in this example. I argue that this explanation should lead us to regard these preferences with suspicion, because it indicates that they may be the result of one or more biases. I conclude that Rachels' and Temkin's example does not provide sufficient grounds for rejecting acyclicity. Key Words: acyclicity • rationality • similarity-based decision-making • heuristics and biases • pain evaluation. (shrink)

Within traditional decision theory, common decision principles - e.g. the principle to maximize utility -- generally invoke idealization; they govern ideal agents in ideal circumstances. In Realistic Decision Theory, Paul Weirch adds practicality to decision theory by formulating principles applying to nonideal agents in nonideal circumstances, such as real people coping with complex decisions. Bridging the gap between normative demands and psychological resources, Realistic Decision Theory is essential reading for theorists seeking precise normative decision principles that acknowledge the limits and (...) difficulties of human decision-making. (shrink)

The rule to maximize expected utility is intended for decisions where options involve risk. In those decisions the decision maker's attitude toward risk is important, and the rule ought to take it into account. Allais's and Ellsberg's paradoxes, however, suggest that the rule ignores attitudes toward risk. This suggestion is supported by recent psychological studies of decisions. These studies present a great variety of cases where apparently rational people violate the rule because of aversion or attraction to risk. Here I (...) attempt to resolve the issue concerning expected utility and risk. I distinguish two versions of the rule to maximize expected utility. One adopts a broad interpretation of the consequences of an option and has great intuitive appeal. The other adopts a narrow interpretation of the consequences of an option and seems to have certain technical and practical advantages. I contend that the version of the rule that interprets consequences narrowly does indeed neglect attitudes toward risk. That version of the rule excludes the risk involved in an option from the consequences of the option and, contrary to what is usually claimed, cannot make up for this exclusion through adjustments in probability and utility assignments. I construct a new, general argument that establishes this in a rigorous way. On the other hand, I contend that the version of the rule that interprets consequences broadly takes account of attitudes toward risk by counting the risk involved in an option among the consequences of the option. I rebut some objections to this version of the rules, in particular, the objection that the rule lacks practical interest. Drawing upon the literature on 'mean-risk' decision rules, I show that this version of the rule can be used to solve some realistic decision problems. (shrink)

In many real-world gambles, a non-trivial amount of time passes before the uncertainty is resolved but after a choice is made. An individual may have a preference between gambles with identical probability distributions over final outcomes if they differ in the timing of resolution of uncertainty. In this domain, utility consists not only of the consumption of outcomes, but also the psychological utility induced by an unresolved gamble. We term this utility anxiety. Since a reflective decision maker may want to (...) include anxiety explicitly in analysis of unresolved lotteries, a multiple-outcome model for evaluating lotteries with delayed resolution of uncertainty is developed. The result is a rank-dependent utility representation (e.g., Quiggin, 1982), in which period weighting functions are related iteratively. Substitution rules are proposed for evaluating compound temporal lotteries. The representation is appealing for a number of reasons. First, probability weights can be interpreted as the cognitive attention allocated to certain outcomes. Second, the model disaggregates strength of preference from temporal risk aversion and thus provides some insight into the old debate about the relationship between von Neumann–Morgenstern utility functions and strength of preference value functions. (shrink)

Since the middle of this century, the dominant prescriptive approach to decision theory has been a deductive viewpoint which is concerned with axioms of rational preference and their consequences. After summarizing important problems with the preference primitive, this paper argues for a constructive approach in which information is the foundation for decision-making. This approach poses comparability of uncertain acts as a question rather than an assumption. It is argued that, in general, neither preference nor subjective probability can be assumed given, (...) and that these need to be generated by using the relevant information available to the decision-agent in a given situation. A specific constructive model is discussed and illustrated with a real example from this viewpoint. (shrink)