Decision Theory

We will focus on two prominent areas of decision-theoretic research: (i) decisions under uncertainty; and

(ii) theories of behavioral choices.

For the first topic, we will begin by looking at the question of the foundations of subjective probabilities and Bayesianism. We will study the classic approaches of De Finetti, Savage and Anscombe-Aumann to this question. Thereafter, we will focus attention on the large and impressive literature on decision making under ambiguity that has emerged in the last three decades or so. Ambiguity, here, refers to decision settings in which a decision maker perceives “ . . . uncertainty about probability, created by missing information that is relevant and could be known” (Frisch and Baron, 1988). That such decision settings exist was pointed out by Ellsberg (1961). His work showed how ambiguity represents a normative criticism of the subjective expected utility framework of Savage (1954) and, by extension, of the Bayesian paradigm. It was David Schmeidler’s work in the late 1980s that revived interest in this area of research. We will cover important models like Schmeidler’s Choquet expected utility, Gilboa and Schmeidler’s maxmin expected utility, Klibanoff, Marinacci and Mukerji’s smooth model of ambiguity, and Siniscalchi’s vector expected utility

For the second topic, we will, first, look at the case against rational choice theory. Thereafter, we will focus on a selected set of topics which will be proposed as responses to the descriptive (and at times normative) limitations of rational choice theory. Amongst them will be Kahneman and Tversky’s heuristics and biases program, along with a discussion of dual process theories of cognition. We will also look at prospect theory and the theme of reference dependent preferences, more generally. Other topics that will be covered are theories of temptation and self-control, sequential choice procedures featuring multiple rationales, choice theories featuring limited consideration and theories of social influence.

Prerequisite: ECO 5102 (Microeconomics II)