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INTRODUCTION TO DECISION THEORY

(ECN 203C, Fall 2008)

Klaus Nehring
1110 SSHB
752-3379

Course Organization
Homework: weekly problem sets.
Evaluation:

regular handing in of homework

20%.

take-home midterm (probably around Veterans day)


final paper

40%,

40%.

The paper could consist of various things:


1. A literature review identifying an interesting open and possibly doable research question
2. A (possibly small) new result (I may be able to give you some projects)
3. A fairly thorough discussion of the normativity of some axiom / the validity of some type
of normative argument
4. A simple application of some decision-theoretic model in an economic context.
A written proposal is due on Monday, November 10; it counts 10% out of the 40%. The final
version is due on Tuesday, December 9.

Weeks 1 through 3:
Rational Choice and Revealed Preference
The Standard Model
Kreps, David M. (1988) . Notes on the Theory of Choice, Westview Press, Boulder, ch. 2.1
see also: Mas-Colell, A. , Whinston, M. and J. Green (1995), Microeconomic Theory, Oxford
UP, ch. 1.
Rationality and Revealed Preference
Elster, J. (1983), Rationality, in: Sour Grapes- Studies in the Subversion of Rationality,
Cambridge University Press, ch. 1, 1-26.
Sen, A. (1973), Behavior and the Concept of Preference, Economica 40, p. 241-259
Bar-Hillel, M. and A. Margalit (1988) , How Vicious are Cycles of Intransitive Choice,
Theory and Decision 24, 119-145.

Choice under Incompleteness


Moulin, H. (1985) , Choice Functions over a Finite Set: A Summary, Social Choice and
Welfare 2, p. 147-160.
Nehring, K. (1997) , Rational Choice and Revealed Preference without Binariness, Social
Choice and Welfare 14, 403-425.
Manzini, P. and M. Mariotti (2007), Sequentially Rationalizable Choice, American Economic
Review, forthcoming.
Masatlioglu, Y. and E. Ok (2005), Rational Choice with Status Quo Bias, Journal of Economic Theory 121, 1-29.
Ordinal Utility
Kreps , Notes, ch. 3
1 *-ed

readings are required.

Weeks 4 and 5: Temptation and Self-Control


Modeling Temptation
Gul, F. and W. Pesendorfer (2001) : Temptation and Self-Control, Econometrica 69, 14031435.
Gul, F. and W. Pesendorfer (2006): The Simple Theory of Temptation, mimeo.
Nehring, K. (2006) : Resisting Temptation, mimeo.
General Models of Self-Control
Nehring, K. (2006) : Self-Control through Second-Order Preferences, mimeo.
Dekel, A., B. Lipman and A. Rustichini (2006): Temptation-Driven Preferences, mimeo.
Related non-axiomatic models
Bernheim, D. and A. Rangel (2005): Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers, forthcoming in Economic Institutions and Behavioral
Economics, edited by Peter Diamond and Hannu Vartiainen, Princeton University Press
Fudenberg, D. and D. Levine (2005): A Dual Self Model of Impulse Control, Harvard University Working Paper, forthcoming in the American Economic Review.
Loewenstein, G. and ODonoghue, E. (2005): Animal Spirits: Aective and Deliberative
Processes in Economic Behavior, mimeo.

Weeks 6 through 8:
Decision Making Under Uncertainty: Expected Utility Theory

Expected Utility Theory under Risk (Known Probabilities).


The von-Neumann Morgenstern Representation Theorem; Characterizing Risk-Attitudes
3

Kreps , Notes, ch. 5 and 6


Mas-Colell, A. , Whinston, M. and J. Green (1995), Microeconomic Theory, Oxford UP, ch.
6 .

Expected Utility with Subjective Probabilities.


The Fundamental Representation Theorem
Kreps, David M. (1988) . Notes on the Theory of Choice, Westview Press, Boulder, ch. 8 and
9.
Savage, L. (1954, 19722 ), The Foundations of Statistics, Dover N.Y., ch. 1-5.
Fishburn, P. (1970), Utility Theory for Decision Making, John Wiley, NY, ch. 14: Savages
Expected Utility Theory.
Mixing Subjective and Objective Probabilities: The Anscombe-Aumann Approach
Kreps, Notes, ch. 7.
Probabilistic Sophistication: Non-Expected Utility Decisions based on Subjective Probabilities
Machina, M. and D. Schmeidler (1992) , A More Robust Definition of Subjective Probability,
Econometrica 60, 745-780.
Normative Issues:
Broome, John (1991, pb. 1995). Weighing Goods, Basil Blackwell, Oxford, ch. 5.
On the notion of Subjective Probability:
Kreps, Notes, ch. 11.
Fitelson, B., A. Hajek and N. Hall, Probability, in: J. Pfeifer and S. Sarkar (eds.), Philosophy
of Science: An Encyclopedia, Routledge Press, forthcoming.
Framing
Ahn, D. and H. Ergin (2007), Framing Contingencies, mimeo.
4

Weeks 9 and 10: Non-Expected Utility Theory under Risk


Overview
Wu, G., J. Zhang and R. Gonzalez (2004) , Decision under Risk in, Blackwell Handbook of
Judgment and Decision Making, N. Harvey and D. Koehler (Eds.).

Expected Utility implies Almost-Risk Neutrality for Moderate Stakes


Rabin, M. (2000) , Risk Aversion and Expected-Utility Theory: A Calibration Theorem,
Econometrica 68, 1281-1292.

Quasi-Expected Utility Theory with Loss Aversion and Endogeneous Status Quo Point
Dekel, E (1986), An Axiomatic Characterization of Preferences under Uncertainty: Weakening the Independence Axiom, Journal of Economic Theory 40, 309-318.
Gul, F. (1991) , A Theory of Disappointment Aversion in Decision-Making under Uncertainty, Econometrica 59, 667-686.
Nehring, K. (2005) , Expected Utility with Psychological Consequences: On the Logic of
Betweenness-Based Preferences, mimeo.

Rank-Dependent Expected Utility and Prospect Theory


Kahneman, D. and A. Tversky (1979) : Prospect Theory: An Analysis of Decision under
Risk, Econometrica 47, p. 263-291.
Diecidue, E. and P. Wakker (2001): On the Intuition of Rank-Dependent Utility, The Journal
of Risk and Uncertainty, 23:3; 281298.

Week 11: Decision Making under Ambiguity


Representation of Incomplete Beliefs and Preferences
Bewley, T. F. (1986): Knightian Decision Theory, Part I, Cowles Foundation Discussion
Paper No. 807. Reprinted in: Decisions in Economics and Finance 25 (2002), 79-110.

Decision Making under Complete Ignorance


Luce, R. D. and H. Raia (1957) : Games and Decisions. New York, John Wiley, ch. 13.
Nehring, K. (2000): Rational Choice under Ignorance, Theory and Decision 48, 205-240.
A Classical Experiment
Ellsberg, D. (1961) : Risk, Ambiguity, and the Savage Axioms, Quarterly Journal of Economics 75, 643-669.

Models of Decision Making under Ambiguity


Camerer, Colin and Weber, Martin (1992): Recent Developments in Modelling Preferences:
Uncertainty and Ambiguity. Journal of Risk and Uncertainty, 325-370.
Gilboa, I. and D. Schmeidler (1989) : Maxmin Expected Utility with a Non-Unique Prior,
Journal of Mathematical Economics 18, 141-153.
Schmeidler, D. (1989) : Subjective Probability and Expected Utility without Additivity,
Econometrica 57, 571-587.
Tversky, A. and D. Kahneman (1992): Advances in Prospect Theory: Cumulative Representation of Uncertainty, Journal of Risk and Uncertainty 5, 297-323.

Weeks 12: Dynamic Choice


Preference for Flexibility

Kreps, D. (1979) : A Representation Theorem for Preference for Flexibility, Econometrica


47, p. 565-577.
Nehring, K. (1999), Preference for Flexibility in a Savage Framework, Econometrica 67,
101-120.
Dekel, E., B. Lipman and A. Rustichinni (2001): Representing Preferences with a Unique
Subjective State Space, Econometrica 69, 891-934.
Ergin, H. and T. Sarver (2005), A Unique Costly Contemplation Representation, mimeo
MIT.