Boundedly rational expected utility theory

We build a satisficing model of choice under risk which embeds Expected Utility Theory (EUT) into a boundedly rational deliberation process. The decision maker accumulates evidence for and against alternative options by repeatedly sampling from her underlying set of EU preferences until the evidence favouring one option satisfies her desired level of confidence. Despite its EUT core, the model produces patterns of behaviour that violate standard EUT axioms, while at the same time capturing systematic relationships between choice probabilities, response times and confidence judgments, which are beyond the scope of theories that do not take deliberation into account.

     

Strategic communication with reporting costs

A decision maker relies on information of parties affected by her decision. These parties try to influence her decision by selective disclosure of facts. As is well known from the literature, competition between the informed parties constrains their ability to manipulate information. We depart from this literature by introducing a cost to communicate. Our parties trade off their reporting cost against the effect on the decision. Some information is never revealed. In contrast to setups without communication costs, our decision maker can benefit by ex ante committing to an ex post suboptimal decision rule. Moreover, committing ex ante not to listen to one of the parties may also be beneficial for the decision maker.

     

Stochastic dominance in multicriterion analysis under risk

Traditionally, in the literature on the modelling of decision aids one notes the propensity to treat expected utility models and outranking relation models as rivals. It may be possible, however, to benefit from the use of both approaches in a risky decision context. Stochastic dominance conditions can be used to establish, for each criterion, the preferences of a decision maker and to characterise them by a concave or convex utility function.Two levels of complexity in preference elicitation, designated as clear and unclear, are distinguished. Only in the case of unclear preferences is it potentially interesting to attempt to estimate the value function of the decision maker, thus obtaining his (her) preferences with a reduced number of questions. The number of questions that must be asked of the decision maker depends upon the level of the concordance threshold that he(she) requires in the construction of the outranking relations using the ELECTRE method.     

Even Risk-Averters may Love Risk

A decision maker bets on the outcomes of a sequence of coin-tossings. At the beginning of the game the decision maker can choose one of two coins to play the game. This initial choice is irreversible. The coins can be biased and the player is uncertain about the nature of one (or possibly both) coin(s). If the player is an expected-utility maximizer, her choice of the coin will depend on different elements: the nature of the game (namely, whether she can observe the outcomes of the previous tosses before making her next decision), her utility function, the prior distribution on the bias of the coin. We will show that even a risk averter might optimally choose a riskier coin when learning is allowed. We will express most of our results in the language of stochastic orderings, allowing comparisons that are valid for large classes of utility functions.     

A Simple Risk-Sharing Experiment

This paper reports on an experiment designed to test whether pairs of individuals are able to exploit ex ante efficiency gains in the sharing of a risky financial prospect. Observations from a previous experiment had suggested a general rejection of efficiency in favour of ex post equality. The present experiment explores some possible explanations for this. The results indicate that fairness is not a significant consideration, but rather that having to choose between prospects diverts partners from allocating the chosen prospect efficiently.     

A model of consumption-dependent temptation

The paper characterizes axiomatically a class of temptation-driven preferences. The key (but not the only) novelty of the paper is the idea that the alternative which tempts when an item x is consumed may not be the same as the alternative which tempts when another item y is consumed. For any single item to be ultimately consumed, the other items can be ranked by how much they tempt. An individual contemplates, as an alternative consumption, only the item that tempts most. The utility of a menu is then equal to the utility of the item that is consumed less a (psychological) cost of resisting temptation; this cost depends on both: the item to be consumed and the item that tempts. Unlike most of the existing literature, the axioms are imposed on deterministic menus, not on menus of lotteries.     

Rules rather than discretion: Lessons from Hurricane Katrina

This paper explores options for programs to be put in place prior to a disaster to avoid large and often poorly-managed expenditures following a catastrophe and to provide appropriate protection against the risk of those large losses which do occur. The lack of interest in insurance protection and mitigation by property owners and by public sector agencies prior to a disaster often creates major problems following a catastrophic event for victims and the government. Property owners who suffer severe damage may not have the financial resources easily at hand to rebuild their property and hence will demand relief. The government is then likely to respond with costly but poorly targeted disaster assistance. To avoid these large and often uneven ex post expenditures, we consider the option of mandatory comprehensive private disaster insurance with risk-based rates. It may be more efficient to have an ex ante public program to ensure coverage of catastrophic losses and to subsidize low income residents who cannot afford coverage rather than the current largely ex post public disaster relief program.     

Dynamic consistency in extensive form decision problems

In a stimulating paper, Piccione and Rubinstein (1997) argued how a decision maker could undertake dynamically inconsistent choices when, in an extensive form decision problem, she has a particular type of imperfect recall named absentmindedness. Such memory limitation obtains whenever information sets include decision histories along the same decision path. Starting from work focusing on the absentminded driver example, and independently developed by Segal (2000) and Dimitri (1999), the main theorem of this article provides a general result of dynamically consistent choices, valid for a large class of finite extensive form decision problems without nature.      

A Method for Eliciting Utilities and its Application to Collective Choice

Designing a mechanism that provides a direct incentive for an individual to report her utility function over several alternatives is a difficult task. A framework for such mechanism design is the following: an individual (a decision maker) is faced with an optimization problem (e.g., maximization of expected utility), and a mechanism designer observes the decision maker’s action. The mechanism does reveal the individual’s utility truthfully if the mechanism designer, having observed the decision maker’s action, infers the decision maker’s utilities over several alternatives. This paper studies an example of such a mechanism and discusses its application to the problem of optimal social choice. Under certain simplifying assumptions about individuals’ utility functions and about how voters choose their voting strategies, this mechanism selects the alternative that maximizes Harsanyi’s social utility function and is Pareto-efficient.     

A Rule For Updating Ambiguous Beliefs

When preferences are such that there is no unique additive prior, the issue of which updating rule to use is of extreme importance. This paper presents an axiomatization of the rule which requires updating of all the priors by Bayes rule. The decision maker has conditional preferences over acts. It is assumed that preferences over acts conditional on event E happening, do not depend on lotteries received on E ^c, obey axioms which lead to maxmin expected utility representation with multiple priors, and have common induced preferences over lotteries. The paper shows that when all priors give positive probability to an event E, a certain coherence property between conditional and unconditional preferences is satisfied if and only if the set of subjective probability measures considered by the agent given E is obtained by updating all subjective prior probability measures using Bayes rule.     

Negotiation and Defeasible Decision Making

In economically meaningful interactions negotiations are particularly important because they allow agents to improve their information about the environment and even to change accordingly their own characteristics. In each step of a negotiation an agent has to emit a message. This message conveys information about her preferences and endowments. Given that the information she uses to decide which message to emit comes from beliefs generated in previous stages of the negotiation, she has to cope with the uncertainty associated with them. The assessment of the states of the world also evolves during the negotiation. In this paper we analyze the intertwined dynamics of beliefs and decision, in order to determine conditions on the agents that allow them to reach agreements. The framework for decision making we consider here is based on defeasible evaluation of possibilities: an argument for a choice defeats another one if it is based on a computation that better uses all the available information.     

The Deep Side of Preference Theory

An individual is said to have a taste for a particular menu, i.e. a subset of available commodities, if he is indifferent between all commodity bundles that contain the same quantity for each commodity which actually is in the menu, whatever the rest of the bundle. Then, a taste is directly defined as a deep property of preferences. As a first result, it is shown that a complete and transitive preference relation over the commodity bundles is equivalent to regular tastes where regularity means that tastes can be derived from a pure qualitative relation between the different commodities. Besides, a preference family based on preference relations corresponding to each particular commodity is said to be rationalizable if there exists a metapreference over commodity bundles which consistently summarizes the preference family and then allows to decide. As a second result, it is shown that if a preference family is rationalizable, then the tastes are organized thanks to a reflexive and transitive qualitative relation between the different commodities.     

Preference stability and substitution of indifferents: a rejoinder to Seidenfeld

Seidenfeld (Seidenfeld, T. [1988a], Decision theory without 'Independence' or without 'Ordering', Economics and Philosophy 4: 267-290) gave an argument for Independence based on a supposition that admissibility of a sequential option is preserved under substitution of indifferents at choice nodes (S). To avoid a natural complaint that (S) begs the question against a critic of Independence, he provided an independent proof of (S) in his (Seidenfeld, T. [1988b], Rejoinder [to Hammond and McClennen], Economics and Philosophy 4: 309-315). In reply to my (Rabinowicz, W. [1995], To have one's cake and eat it too: Sequential choice and expected-utility violations, The Journal of Philosophy 92: 586-620), in which I argue that the proof is invalid, Seidenfeld (Seidenfeld, T. [2000], Substitution of indifferent options at choice nodes and admissibility: A reply to Rabinowicz, Theory and Decision 48: 305–310 this issue) submits that I fail to give due consideration to one of the underlying assumptions of his derivation: it is meant to apply only to those cases in which the agent's preferences are stable throughout the sequential decision process. The purpose of this note is to clarify the notion of preference stability so as meet this objection.     

The Value of a Probability Forecast from Portfolio Theory

A probability forecast scored ex post using a probability scoring rule (e.g. Brier) is analogous to a risky financial security. With only superficial adaptation, the same economic logic by which securities are valued ex ante – in particular, portfolio theory and the capital asset pricing model (CAPM) – applies to the valuation of probability forecasts. Each available forecast of a given event is valued relative to each other and to the “market” (all available forecasts). A forecast is seen to be more valuable the higher its expected score and the lower the covariance of its score with the market aggregate score. Forecasts that score highly in trials when others do poorly are appreciated more than those with equal success in “easy” trials where most forecasts score well. The CAPM defines economically rational (equilibrium) forecast prices at which forecasters can trade shares in each other’s ex post score – or associated monetary payoff – thereby balancing forecast risk against return and ultimately forming optimally hedged portfolios. Hedging this way offers risk averse forecasters an “honest” alternative to the ruse of reporting conservative probability assessments.     

Perspective‐taking and gift‐giving in Chinese preschool children

This study explored Chinese preschool children's perspective‐taking via a gift‐giving paradigm. Unlike findings with North American children (Atance et al. in, Dev Psychol 46:1505–1513, 2010), the results from two experiments (N_{Exp. 1} = 329; N_{Exp. 2} = 112) showed that allowing Chinese children to first choose a desired object for themselves did not enhance their subsequent perspective‐taking performance in gift selection or gift justifications. This was true regardless of gift type (consumable or recreational items) or of recipient (mom, teacher, experimenter, or friend). In addition, children's perspective‐taking did not correlate with their performances in behavioral inhibition and delay of gratification tasks. These results suggest the possibility that the prior desire fulfillment effect varies with children's socio‐cultural experiences. Finally, Chinese children showed better perspective‐taking in choosing consumable gifts (e.g., drinks, snacks) than recreational gifts (e.g., toys, magazines), although this effect was not found for gift selection in Experiment 2. One interpretation of these results is that children's capacity for prosocial perspective‐taking is influenced by socio‐cultural experiences and social knowledge about individuals' preferences for different kinds of objects.     

Ordinal preference representations

Ordinal preferences have several advantages over the traditional cardinal expressions of preference. Three different representations of ordinal preferences useful in multi-participant modelling are presented, and their features compared. One approach is thepayoff representation that is based on an ordinal normal form game. A second representation of ordinal preferences is thepreference vector, based on the option form of the game. The option form consists of a list of players, with each player followed by the options under its control. The third representation of ordinal preferences is thepreference tree. A preference tree is an implied binary tree that captures the information of preference vector in a more compact manner by making use of its lexicographic structure. The preference tree offers considerable compactness and computational efficiency over the other two approaches.     

The individual rationality of maintaining a sense of justice

Let us say that an individual possesses aprincipled preference if she prefers satisfying her preferences without violating the principles of justice governing her community to satisfying her preferences by violating these principles. Although living among possessors of principled preferences benefits individuals, maintaining such a preference is individually costly. Further, individuals can benefit from others possessing principled preferences without themselves possessing one. In this paper, I argue that occupying a choice situation which mirrors key aspects of our own situation, maximizing rationality requires individuals to develop and maintain principled preferences.To establish that maintaining a principled preference is individually rational for the occupants of such a choice situation, I define a range of individual strategies for them, model their choice of individual strategies as a game, and argue that this game involves an equilibrium in which all of its participants would choose to develop and maintain a principled preference.     

Intentional time inconsistency

We propose a theoretical model to explain the usage of time-inconsistent behavior as a strategy to exploit others when reputation and trust have secondary effects on the economic outcome. We consider two agents with time-consistent preferences exploiting common resources. Supposing that an agent is believed to have time-inconsistent preferences with probability p,  we analyze whether she uses this misinformation when she has the opportunity to use it. Using the model originally provided by Levhari and Mirman (Bell J Econ 11(1):322–334, 1980), we determine the optimal degree of present bias that the agent would like to have while pretending to have time-inconsistent preferences and we provide the range of present-bias parameter under which deceiving is optimal. Moreover, by allowing the constant relative risk aversion class of utility form, we characterize the distinction between pretending to be naive and sophisticated.

     

Process fairness,outcome fairness,and dynamic consistency: Experimental evidence for risk and ambiguity

Literature on fairness preferences distinguishes between outcome fairness, concerning the final allocation of payoffs, and process fairness, concerning the expected allocation of payoffs. It is not obvious, however, whether process fairness can consistently be implemented. Once uncertainty is resolved and outcomes are determined, the ex-ante procedurally fair decision maker may become consequentialist ex-post, and reconsider her choice on the basis of the observed outcomes. We present experimental evidence on dynamic consistency of social preferences under both known risk and ambiguity. A significant share of people subscribe to process fairness both before and after the resolution of uncertainty.