Risk and Tradeoffs

Erkenntnis 79 (S6):1091-1117 (2014)
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Abstract

The orthodox theory of instrumental rationality, expected utility (EU) theory, severely restricts the way in which risk-considerations can figure into a rational individual's preferences. It is argued here that this is because EU theory neglects an important component of instrumental rationality. This paper presents a more general theory of decision-making, risk-weighted expected utility (REU) theory, of which expected utility maximization is a special case. According to REU theory, the weight that each outcome gets in decision-making is not the subjective probability of that outcome; rather, the weight each outcome gets depends on both its subjective probability and its position in the gamble. Furthermore, the individual's utility function, her subjective probability function, and a function that measures her attitude towards risk can be separately derived from her preferences via a Representation Theorem. This theorem illuminates the role that each of these entities plays in preferences, and shows how REU theory explicates the components of instrumental rationality.

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Author's Profile

Lara Buchak
Princeton University

Citations of this work

Risk Attitudes and Social Choice.Simon Blessenohl - 2020 - Ethics 130 (4):485-513.
Normative Decision Theory.Edward Elliott - 2019 - Analysis 79 (4):755-772.
A Dutch Book Theorem for Quantificational Credences.Benjamin Lennertz - 2017 - Ergo: An Open Access Journal of Philosophy 4.
On Risk and Rationality.Brad Armendt - 2014 - Erkenntnis 79 (S6):1-9.

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References found in this work

The Logic of Decision.Richard C. Jeffrey - 1965 - New York, NY, USA: University of Chicago Press.
Risk and Rationality.Lara Buchak - 2013 - Oxford University Press.
The Logic of Decision.Henry E. Kyberg - 1968 - Philosophical Review 77 (2):250.
Prospect Theory: An Analysis of Decision Under Risk.D. Kahneman & A. Tversky - 1979 - Econometrica: Journal of the Econometric Society:263--291.

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