Theories of choice under ignorance and uncertainty (original) (raw)

Risk , uncertainty and the expected utility theory

2019

The present contribution examines the emergence of expected utility theory by John von Neumann and Oskar Morgenstern, the subjective the expected utility theory by Savage, and the problem of choice under risk and uncertainty, focusing in particular on the seminal work “The Utility Analysis of Choices involving Risk" (1948) by Milton Friedman and Leonard Savage to show how the evolution of the theory of choice has determined a separation of economics from psychology.

Decisions under risk and uncertainty: A survey of recent developments

ZOR Zeitschrift f� Operations Research Methods and Models of Operations Research, 1992

This paper reviews recently proposed axiomatic models of choice under uncertainty and risk. The presentation focuses on the various models of transitive preferences which abandon the expected utility hypothesis by weakening the strong separability assumption known as the sure thing principle in the case of uncertainty and as the independence axiom in the case of risk. Special emphasis is on the remarkable similarities held in common by both the approaches to decisions under uncertainty and under risk.

Axiomatic Theory of Probabilistic Decision Making under Risk

This paper analyzes individual decision making under risk. It is assumed that an individual does not have a preference relation on the set of risky lotteries. Instead, the primitive of choice is a choice probability that captures the likelihood of one lottery being chosen over the other. Choice probabilities have a stochastic utility representation if they can be written as a non-decreasing function of the difference in expected utilities of the lotteries. Choice probabilities admit a stochastic utility representation if and only if they are complete, strongly transitive, continuous, independent of common consequences and interchangeable. Axioms of stochastic utility are consistent with systematic violations of betweenness and a common ratio effect but not with a common consequence effect. Special cases of stochastic utility include the Fechner model of random errors, Luce choice model and a tremble model of Harless and Camerer (1994).

Risk, ambiguity, and the separation of utility and beliefs

Mathematics of Operations Research, 2001

We introduce a general model of static choice under uncertainty, arguably the weakest model achieving a separation of cardinal utility and a unique representation of beliefs. Most of the non-expected utility models existing in the literature are special cases of it. Such separation is motivated by the view that tastes are constant, whereas beliefs change with new information. The model has a simple and natural axiomatization.

Robust rationality and decisions under severe uncertainty

Journal of the Franklin Institute, 2000

This paper develops a prescriptive approach to decision-making with severely uncertain information, and explores risk-taking behavior, based on non-probabilistic set-models of information-gap uncertainty. Info-gap models are well suited for representing uncertainty arising from severe lack of information, and lead naturally to a decision strategy which maximizes the decision-maker's immunity to uncertainty, while also achieving no less than a speci"ed minimum reward. We prove a`gambler's theorema which quanti"es the trade-o! between reward and immunity to uncertainty. This trade-o! forces the decision-maker to gamble, but without employing a probabilistic framework. We present a complementary theorem expressing the trade-o! between immunity and windfall reward, and a further result characterizing the antagonism between robustness to failure and opportunity for success. Next, we develop a measure of risk-sensitivity based on the idea of immunity to uncertainty, without any probabilistic underpinning and without the assumptions of von Neumann}Morgenstern utility theory. We prove a theorem which establishes the relation between a decision-maker's aversion to uncertainty and the information which is available to him. Our "nal theorem establishes conditions in which the magnitude of the decision-maker's commitment of resources will increase with his fondness for risk.

Essays on Decision Making under Uncertainty

2015

Professor Moshe Buchinsky, Co-chair Professor William R. Zame, Co-chair This dissertation consists of three chapters about decision making under uncertainty. Chapter 1: "Testing between Models of Smoking Risk Perceptions" Research in social and health psychology reports that smokers systematically underestimate the personal smoking risk. I build a model that captures potential determinants of smoking risk perceptions to investigate how smoking may cause an underestimation of the risk. The model is based on the premise that smokers have an incentive to be optimistic: because quitting may be hard, they find it reassuring to think that smoking is not so risky. Drawing upon the theoretical framework, I suggest two empirical tests of the model-one using survey data and another based on a laboratory experiment. iii Chapter 2: "Does Uncertainty Cause Inertia in Decision Making? An Experimental Study of the Role of Regret Aversion and Indecisiveness" Previous research has shown that in many situations there is clear inertia in individual decision making-that is, a tendency for decision makers to choose a status quo option. The status quo option may be the result of a previous choice, or may simply be the option designated as the "default." While inertia may simply reflect the fact that individuals view the status quo option as optimal, there are other factors that may explain this observed behavior. I conduct a laboratory experiment to thoroughly investigate two potential determinants of inertia in uncertain environments: (i) regret aversion and (ii) indecisiveness. A decision maker may experience regret when the outcome of a choice compares unfavorably to the outcome that would have occurred had she made a different choice. Alternatively, a decision maker may be indecisive among the options if she does not know the probability distributions over the relevant outcomes. I use a between-subjects design, with varying conditions, to identify the effects of regret aversion and indecisiveness on choice behavior. In each condition, participants choose between two simple real gambles, one of which is assigned to be the status quo. I find that inertia is quite large and that both mechanisms are equally important. Chapter 3: "Risk, Ambiguity, and Diversification" Attitudes toward risk influence the decision to diversify among uncertain options. Yet, because in most situations the probability distributions over outcomes are unknown, attitudes toward ambiguity may also play an important role. In a simple laboratory experiment, I investigate the effect of ambiguity on the decision to diversify. Participants have the opportunity to diversify between gambles; in one condition, all gambles are risky, whereas in the other all gambles are iv ambiguous. I find that diversification is more prevalent and more persistent under ambiguity than under risk. Moreover, excess diversification under ambiguity is driven by participants who stick with a status quo gamble when diversification is not feasible. This behavioral pattern cannot be accommodated by major theories of choice under ambiguity. v The dissertation of Santiago Ignacio Sautua is approved.