Mark J. Machina
- Published in print:
- 2000
- Published Online:
- September 2007
- ISBN:
- 9780199240692
- eISBN:
- 9780191714269
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199240692.003.0009
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter begins with a description of a model of individual choice under uncertainty, namely, the expected utility model of preferences for lotteries. A number of problems are examined from the ...
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This chapter begins with a description of a model of individual choice under uncertainty, namely, the expected utility model of preferences for lotteries. A number of problems are examined from the perspective of linearity in the probabilities: the ‘Allais’ paradox or fanning out of indifference curves, the common-ratio effect for negative pay-offs, the effect of risk aversion, preference reversal, and framing effects (i.e., where systematic differences occur in choice due to alternative means of representing probalistically equivalent choice problems). The final section of the chapter discusses how private-sector decision analysts, government agencies, and environmental policy makers should adjust their prescriptive (normative) decision practices in the light of these findings.Less
This chapter begins with a description of a model of individual choice under uncertainty, namely, the expected utility model of preferences for lotteries. A number of problems are examined from the perspective of linearity in the probabilities: the ‘Allais’ paradox or fanning out of indifference curves, the common-ratio effect for negative pay-offs, the effect of risk aversion, preference reversal, and framing effects (i.e., where systematic differences occur in choice due to alternative means of representing probalistically equivalent choice problems). The final section of the chapter discusses how private-sector decision analysts, government agencies, and environmental policy makers should adjust their prescriptive (normative) decision practices in the light of these findings.
Paul Weirich
- Published in print:
- 2004
- Published Online:
- November 2004
- ISBN:
- 9780195171259
- eISBN:
- 9780199834976
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/019517125X.003.0002
- Subject:
- Philosophy, Logic/Philosophy of Mathematics
Decision principles aim at optimization, or realization of an act better than alternative acts. Given uncertainty, an agent’s subjective utility assignment to options assesses an option’s prospects ...
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Decision principles aim at optimization, or realization of an act better than alternative acts. Given uncertainty, an agent’s subjective utility assignment to options assesses an option’s prospects in light of the agent’s information. The pertinent decision goal becomes maximization of utility. An option’s utility depends on the probabilities and utilities of its possible outcomes and so is an expected utility. The step from optimization to utility maximization illustrates a decision principle’s adjustment after removing the idealization of full information.Less
Decision principles aim at optimization, or realization of an act better than alternative acts. Given uncertainty, an agent’s subjective utility assignment to options assesses an option’s prospects in light of the agent’s information. The pertinent decision goal becomes maximization of utility. An option’s utility depends on the probabilities and utilities of its possible outcomes and so is an expected utility. The step from optimization to utility maximization illustrates a decision principle’s adjustment after removing the idealization of full information.
Han Bleichrodt and Ulrich Schmidt
- Published in print:
- 2009
- Published Online:
- May 2009
- ISBN:
- 9780199290420
- eISBN:
- 9780191710506
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199290420.003.0004
- Subject:
- Economics and Finance, Public and Welfare
Expected utility is the dominant framework for analyzing decisions under risk and uncertainty. Many empirical studies show that people deviate systematically from expected utility. To accommodate ...
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Expected utility is the dominant framework for analyzing decisions under risk and uncertainty. Many empirical studies show that people deviate systematically from expected utility. To accommodate these deviations new, non‐expected utility models have been proposed. Among these models prospect theory is the most influential. This chapter studies applications of non‐expected utility and in particular prospect theory in insurance economics, auctions, and health economics. This chapter shows how the insights from non‐expected utility have improved understanding of people's choices and have led to improved decisions and more accurate measurements of utility.Less
Expected utility is the dominant framework for analyzing decisions under risk and uncertainty. Many empirical studies show that people deviate systematically from expected utility. To accommodate these deviations new, non‐expected utility models have been proposed. Among these models prospect theory is the most influential. This chapter studies applications of non‐expected utility and in particular prospect theory in insurance economics, auctions, and health economics. This chapter shows how the insights from non‐expected utility have improved understanding of people's choices and have led to improved decisions and more accurate measurements of utility.
Anita M. Superson
- Published in print:
- 2009
- Published Online:
- May 2009
- ISBN:
- 9780195376623
- eISBN:
- 9780199871551
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195376623.001.0001
- Subject:
- Philosophy, Feminist Philosophy
This book challenges the traditional picture of the skeptic who asks, “Why be moral?” and demands a demonstration that acting in morally required ways is rationally required. It argues that we defeat ...
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This book challenges the traditional picture of the skeptic who asks, “Why be moral?” and demands a demonstration that acting in morally required ways is rationally required. It argues that we defeat the action skeptic, as well as the disposition skeptic, who denies that being morally disposed is rationally required, and the motive skeptic, who believes that merely going through the motions in acting morally is rationally permissible. It argues, against internalism, that we address the amoralist, who is not moved by moral reasons he recognizes. It argues for expanding the skeptic's position from self-interest to privilege, to include morally unjustified behavior typically directed against disenfranchised social groups. It argues for revising the traditional expected utility model of rationality to exclude desires deformed by patriarchy as ones it is not irrational to have. It defends the Interdependency Thesis, which assesses the rationality of moral dispositions and of actions interdependently, and allows us to fine tune the demands of the skeptic by not focusing on acts and dispositions in themselves, but on their interconnection. It defends the view that our rational assessments of agents should reflect the complex connection between the agent's reasons for adopting a moral disposition, and for having and acting from it, whether these cohere with her reasons for acting and for wanting to be a morally good person, and the justification for the moral theory or principles she endorses. Acts come in degrees of rationality, as measured by how they contribute to the agent's consistent life plan.Less
This book challenges the traditional picture of the skeptic who asks, “Why be moral?” and demands a demonstration that acting in morally required ways is rationally required. It argues that we defeat the action skeptic, as well as the disposition skeptic, who denies that being morally disposed is rationally required, and the motive skeptic, who believes that merely going through the motions in acting morally is rationally permissible. It argues, against internalism, that we address the amoralist, who is not moved by moral reasons he recognizes. It argues for expanding the skeptic's position from self-interest to privilege, to include morally unjustified behavior typically directed against disenfranchised social groups. It argues for revising the traditional expected utility model of rationality to exclude desires deformed by patriarchy as ones it is not irrational to have. It defends the Interdependency Thesis, which assesses the rationality of moral dispositions and of actions interdependently, and allows us to fine tune the demands of the skeptic by not focusing on acts and dispositions in themselves, but on their interconnection. It defends the view that our rational assessments of agents should reflect the complex connection between the agent's reasons for adopting a moral disposition, and for having and acting from it, whether these cohere with her reasons for acting and for wanting to be a morally good person, and the justification for the moral theory or principles she endorses. Acts come in degrees of rationality, as measured by how they contribute to the agent's consistent life plan.
Anthony F. Heath, Roger M. Jowell, and John K. Curtice
- Published in print:
- 2001
- Published Online:
- November 2003
- ISBN:
- 9780199245116
- eISBN:
- 9780191599453
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199245118.003.0009
- Subject:
- Political Science, UK Politics
The authors offer a multiplicative model that provides a comprehensive framework to place the main findings of the volume. The model is based on the standard ‘expected utility maximization’ model of ...
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The authors offer a multiplicative model that provides a comprehensive framework to place the main findings of the volume. The model is based on the standard ‘expected utility maximization’ model of the economists, which can be applied for understanding election outcomes. The idea is that the voter weights the utility of a given policy by the probability of its being implemented, sums this across the different policies, and then votes for whichever party gives the greatest expected utility. However, Heath, Jowell, and Curtice emphasize the fact that the rational choice model needs to be expanded to include some of the ‘non‐rational’ processes observed in their research such as the possibility that voters’ preferences may be shaped by the political parties and should not to be treated only as independent factors. The model should also be modified to take account of other sorts of processes such as social interaction, social conformity and what the authors have termed the ‘forked‐tail’ effect related to the generalization of the disillusionment from a specific party policy into a general disillusion with the party's competence.Less
The authors offer a multiplicative model that provides a comprehensive framework to place the main findings of the volume. The model is based on the standard ‘expected utility maximization’ model of the economists, which can be applied for understanding election outcomes. The idea is that the voter weights the utility of a given policy by the probability of its being implemented, sums this across the different policies, and then votes for whichever party gives the greatest expected utility. However, Heath, Jowell, and Curtice emphasize the fact that the rational choice model needs to be expanded to include some of the ‘non‐rational’ processes observed in their research such as the possibility that voters’ preferences may be shaped by the political parties and should not to be treated only as independent factors. The model should also be modified to take account of other sorts of processes such as social interaction, social conformity and what the authors have termed the ‘forked‐tail’ effect related to the generalization of the disillusionment from a specific party policy into a general disillusion with the party's competence.
John P. Burkett
- Published in print:
- 2006
- Published Online:
- October 2011
- ISBN:
- 9780195189629
- eISBN:
- 9780199850778
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195189629.003.0020
- Subject:
- Economics and Finance, Microeconomics
This chapter examines the factors that influence an individual's behavior in the face of risk. It analyzes the application of the expected value and expected utility theories in answering the ...
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This chapter examines the factors that influence an individual's behavior in the face of risk. It analyzes the application of the expected value and expected utility theories in answering the question concerning what constitutes rational choice under uncertainty. The findings suggest that people often use three judgmental heuristics when assessing probabilities. These heuristics, which often give biased estimates, include availability, representativeness, and affect. This chapter provides several relevant computational exercises and solutions.Less
This chapter examines the factors that influence an individual's behavior in the face of risk. It analyzes the application of the expected value and expected utility theories in answering the question concerning what constitutes rational choice under uncertainty. The findings suggest that people often use three judgmental heuristics when assessing probabilities. These heuristics, which often give biased estimates, include availability, representativeness, and affect. This chapter provides several relevant computational exercises and solutions.
Matthew D. Adler
- Published in print:
- 2011
- Published Online:
- January 2012
- ISBN:
- 9780195384994
- eISBN:
- 9780199918348
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195384994.003.0008
- Subject:
- Law, Philosophy of Law, Constitutional and Administrative Law
The prior four chapters focused on developing tools for constructing and morally ranking an outcome set: tools that include an account of well-being, principles for measuring well-being using a set U ...
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The prior four chapters focused on developing tools for constructing and morally ranking an outcome set: tools that include an account of well-being, principles for measuring well-being using a set U of utility functions that operate on life-histories, and a continuous prioritarian SWF. This chapter turns to the topic of moral bridge principles. It argues that a continuous prioritarian SWF should be merged with a (refined version of) expected utility theory so as to generate a ranking of choices—notwithstanding violations of the ex ante Pareto and Pigou–Dalton principles. While the SWF framework defended here satisfies the Pareto and Pigou–Dalton principles in terms of the ranking of outcomes, the ex ante versions of these principles constitute an additional requirement which, on balance, should be rejected. The dilemmas that arise in specifying norms of fair distribution under conditions of uncertainty have been discussed by philosophers and social choice theorists.Less
The prior four chapters focused on developing tools for constructing and morally ranking an outcome set: tools that include an account of well-being, principles for measuring well-being using a set U of utility functions that operate on life-histories, and a continuous prioritarian SWF. This chapter turns to the topic of moral bridge principles. It argues that a continuous prioritarian SWF should be merged with a (refined version of) expected utility theory so as to generate a ranking of choices—notwithstanding violations of the ex ante Pareto and Pigou–Dalton principles. While the SWF framework defended here satisfies the Pareto and Pigou–Dalton principles in terms of the ranking of outcomes, the ex ante versions of these principles constitute an additional requirement which, on balance, should be rejected. The dilemmas that arise in specifying norms of fair distribution under conditions of uncertainty have been discussed by philosophers and social choice theorists.
Simon Grant and Timothy Van Zandt
- Published in print:
- 2009
- Published Online:
- May 2009
- ISBN:
- 9780199290420
- eISBN:
- 9780191710506
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199290420.003.0002
- Subject:
- Economics and Finance, Public and Welfare
This chapter reviews classic normative expected utility theory. The goal is to frame the subsequent chapters (which consider more modern extensions to and deviations from this classic theory) in a ...
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This chapter reviews classic normative expected utility theory. The goal is to frame the subsequent chapters (which consider more modern extensions to and deviations from this classic theory) in a way that is accessible to the nonspecialist but also useful to the specialist. The chapter starts from scratch with a revealed preference approach to the existence of a utility function. It then presents the mathematical structure of additive and linear utility representations and their axiomatizations, in the context of abstract choice theory and using intertemporal choice as a source of examples. The chapter is thus able to focus on this mathematical structure without interference the specific interpretation and notation for decision under uncertainty. Furthermore, this approach allows the chapter to focus on the interpretation of the axioms when it turns to decision under uncertainty.Less
This chapter reviews classic normative expected utility theory. The goal is to frame the subsequent chapters (which consider more modern extensions to and deviations from this classic theory) in a way that is accessible to the nonspecialist but also useful to the specialist. The chapter starts from scratch with a revealed preference approach to the existence of a utility function. It then presents the mathematical structure of additive and linear utility representations and their axiomatizations, in the context of abstract choice theory and using intertemporal choice as a source of examples. The chapter is thus able to focus on this mathematical structure without interference the specific interpretation and notation for decision under uncertainty. Furthermore, this approach allows the chapter to focus on the interpretation of the axioms when it turns to decision under uncertainty.
Joseph Heath
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195370294
- eISBN:
- 9780199871230
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195370294.003.0002
- Subject:
- Philosophy, Logic/Philosophy of Mathematics
This chapter examines how the consequentialism postulate, namely, the view that actions are valued only for the sake of their consequences, came to be enshrined in modern rational choice theory. It ...
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This chapter examines how the consequentialism postulate, namely, the view that actions are valued only for the sake of their consequences, came to be enshrined in modern rational choice theory. It goes on to consider some of the reasons that a rational action theory of this type gives rise to the so-called “problem of order.” The latter is analyzed under two rubrics, first the problem of multiple equilibria, and second, the problem of suboptimal equilibria. Taken together, these problems suggest that rational choice theory, in its canonical formulation, cannot serve as a general theory of rational action for the social sciences.Less
This chapter examines how the consequentialism postulate, namely, the view that actions are valued only for the sake of their consequences, came to be enshrined in modern rational choice theory. It goes on to consider some of the reasons that a rational action theory of this type gives rise to the so-called “problem of order.” The latter is analyzed under two rubrics, first the problem of multiple equilibria, and second, the problem of suboptimal equilibria. Taken together, these problems suggest that rational choice theory, in its canonical formulation, cannot serve as a general theory of rational action for the social sciences.
Jason Stanley
- Published in print:
- 2005
- Published Online:
- May 2006
- ISBN:
- 9780199288038
- eISBN:
- 9780191603679
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199288038.003.0006
- Subject:
- Philosophy, Metaphysics/Epistemology
This chapter explains and develops a version of Interest-Relative Invariantism about knowledge, according to which whether or not someone knows that p at a certain time depends in part on what is at ...
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This chapter explains and develops a version of Interest-Relative Invariantism about knowledge, according to which whether or not someone knows that p at a certain time depends in part on what is at stake for them in being right about p at that time.Less
This chapter explains and develops a version of Interest-Relative Invariantism about knowledge, according to which whether or not someone knows that p at a certain time depends in part on what is at stake for them in being right about p at that time.
Mohammed Abdellaoui
- Published in print:
- 2009
- Published Online:
- May 2009
- ISBN:
- 9780199290420
- eISBN:
- 9780191710506
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199290420.003.0003
- Subject:
- Economics and Finance, Public and Welfare
Rank‐dependent utility (RDu) is among the most popular generalizations of the standard model of expected utility. It takes into account the main violations of expected utility (Allais paradox, ...
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Rank‐dependent utility (RDu) is among the most popular generalizations of the standard model of expected utility. It takes into account the main violations of expected utility (Allais paradox, Ellsberg paradox). Furthermore, the replacement of probabilities by decision weights allows us to capture what may be called “chance attitude” in addition to attitude towards outcomes. This chapter aims to bring into focus the main violations of expected utility that opened the way to rank‐dependent utility. Then, it presents the main preference conditions behind rankdependence. The chapter concludes with a few experimental results as regards the elicitation of cumulative prospect theory, the most compelling version of Rank‐dependent utility.Less
Rank‐dependent utility (RDu) is among the most popular generalizations of the standard model of expected utility. It takes into account the main violations of expected utility (Allais paradox, Ellsberg paradox). Furthermore, the replacement of probabilities by decision weights allows us to capture what may be called “chance attitude” in addition to attitude towards outcomes. This chapter aims to bring into focus the main violations of expected utility that opened the way to rank‐dependent utility. Then, it presents the main preference conditions behind rankdependence. The chapter concludes with a few experimental results as regards the elicitation of cumulative prospect theory, the most compelling version of Rank‐dependent utility.
Jie W Weiss and David J Weiss
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195322989
- eISBN:
- 9780199869206
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195322989.003.0032
- Subject:
- Psychology, Cognitive Psychology
This chapter focuses on decision technology—the rules and tools that help us make wiser decisions. It begins by reviewing the three rules that are at the heart of most traditional decision ...
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This chapter focuses on decision technology—the rules and tools that help us make wiser decisions. It begins by reviewing the three rules that are at the heart of most traditional decision technology: multiattribute utility, Bayes' theorem, and subjective expected utility maximization. A comprehensive nineteen-step model is presented to show how to make best use of all three rules. The remainder of the chapter explores recently developed tools of decision technology.Less
This chapter focuses on decision technology—the rules and tools that help us make wiser decisions. It begins by reviewing the three rules that are at the heart of most traditional decision technology: multiattribute utility, Bayes' theorem, and subjective expected utility maximization. A comprehensive nineteen-step model is presented to show how to make best use of all three rules. The remainder of the chapter explores recently developed tools of decision technology.
Paul W. Glimcher
- Published in print:
- 2010
- Published Online:
- January 2011
- ISBN:
- 9780199744251
- eISBN:
- 9780199863433
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199744251.003.0008
- Subject:
- Psychology, Neuropsychology
This chapter demonstrates how to directly link a pre-existing utility-based theory of choice to pre-existing neurobiological descriptions of the brain mechanisms that produce choice. It presents, in ...
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This chapter demonstrates how to directly link a pre-existing utility-based theory of choice to pre-existing neurobiological descriptions of the brain mechanisms that produce choice. It presents, in chronological order, several of the key decision-related neurobiological results from the past three decades. All of these key early results come from single-neuron studies in awake-behaving monkeys. Almost all of these studies were constructed to trace stimulus-response relationships through the nervous system. The chapter shows that they are all compatible with a simple algorithmic instantiation of expected utility theory.Less
This chapter demonstrates how to directly link a pre-existing utility-based theory of choice to pre-existing neurobiological descriptions of the brain mechanisms that produce choice. It presents, in chronological order, several of the key decision-related neurobiological results from the past three decades. All of these key early results come from single-neuron studies in awake-behaving monkeys. Almost all of these studies were constructed to trace stimulus-response relationships through the nervous system. The chapter shows that they are all compatible with a simple algorithmic instantiation of expected utility theory.
Alan Hájek
- Published in print:
- 2012
- Published Online:
- September 2012
- ISBN:
- 9780199604760
- eISBN:
- 9780191741548
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199604760.003.0009
- Subject:
- Philosophy, Philosophy of Religion, Metaphysics/Epistemology
Pascal presents at least three ‘wagers’ for believing in God. Hacking provides three reconstructions of them using the apparatus of Bayesian decision theory — dominance reasoning and calculations of ...
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Pascal presents at least three ‘wagers’ for believing in God. Hacking provides three reconstructions of them using the apparatus of Bayesian decision theory — dominance reasoning and calculations of expected utilities — contending that each is valid. The argument of this chapter is that each is invalid. The chapter canvases McLennen’s reconstruction of the first wager as an argument from ‘superdominance’, it then shows how it can be strengthened in two respects that are faithful to Pascal’s original text; yet the resulting argument is still invalid. The chapter then turns to the second and especially the third wagers, offering two new ways of reformulating them with valid arguments. In the process new decision rules for comparing acts of infinite and indeterminate expected utility are suggested and defended.Less
Pascal presents at least three ‘wagers’ for believing in God. Hacking provides three reconstructions of them using the apparatus of Bayesian decision theory — dominance reasoning and calculations of expected utilities — contending that each is valid. The argument of this chapter is that each is invalid. The chapter canvases McLennen’s reconstruction of the first wager as an argument from ‘superdominance’, it then shows how it can be strengthened in two respects that are faithful to Pascal’s original text; yet the resulting argument is still invalid. The chapter then turns to the second and especially the third wagers, offering two new ways of reformulating them with valid arguments. In the process new decision rules for comparing acts of infinite and indeterminate expected utility are suggested and defended.
Christian Gollier
- Published in print:
- 2012
- Published Online:
- October 2017
- ISBN:
- 9780691148762
- eISBN:
- 9781400845408
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691148762.003.0011
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter describes a sample of the alternative decision criteria that have features which are normatively attractive. A standard critique made to the discounted expected utility (DEU) model that ...
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This chapter describes a sample of the alternative decision criteria that have features which are normatively attractive. A standard critique made to the discounted expected utility (DEU) model that has been used in this volume is that the concavity of the utility function expresses at the same time the aversion to inequalities and the aversion to risk. Moreover, it does not take into account the possibility of an aversion to ambiguity on probabilities, or the formation of consumption habits. Such issues imply that the DEU model is not very good for explaining, or predicting, actual behaviors under uncertainty. However, as this book aims for normative rather than positive arguments, this chapter focuses not on what people actually do, but instead on determining what they should do.Less
This chapter describes a sample of the alternative decision criteria that have features which are normatively attractive. A standard critique made to the discounted expected utility (DEU) model that has been used in this volume is that the concavity of the utility function expresses at the same time the aversion to inequalities and the aversion to risk. Moreover, it does not take into account the possibility of an aversion to ambiguity on probabilities, or the formation of consumption habits. Such issues imply that the DEU model is not very good for explaining, or predicting, actual behaviors under uncertainty. However, as this book aims for normative rather than positive arguments, this chapter focuses not on what people actually do, but instead on determining what they should do.
Jürgen Eichberger and David Kelsey
- Published in print:
- 2009
- Published Online:
- May 2009
- ISBN:
- 9780199290420
- eISBN:
- 9780191710506
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199290420.003.0005
- Subject:
- Economics and Finance, Public and Welfare
Ambiguity refers to a decision situation under uncertainty where there is incomplete information about the likelihood of events. Different formal models of this notion have been developed with ...
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Ambiguity refers to a decision situation under uncertainty where there is incomplete information about the likelihood of events. Different formal models of this notion have been developed with differing implications the representation of ambiguity and ambiguity aversion.Less
Ambiguity refers to a decision situation under uncertainty where there is incomplete information about the likelihood of events. Different formal models of this notion have been developed with differing implications the representation of ambiguity and ambiguity aversion.
Claus Munk
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199585496
- eISBN:
- 9780191751790
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199585496.003.0005
- Subject:
- Economics and Finance, Econometrics
Asset prices are ultimately determined by the asset supply and demand of individuals and to study that we need to model the preferences of individuals. This chapter presents alternative ...
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Asset prices are ultimately determined by the asset supply and demand of individuals and to study that we need to model the preferences of individuals. This chapter presents alternative representations of preferences, from abstract preference relations over utility indices to the more tractable expected utility criterion. The axioms supporting the use of utility indices or even expected utility are discussed. The important concept of risk aversion and the most frequently used utility functions are introduced together with a discussion of their properties and empirical evidence on preferences. Finally, the chapter explains how preferences can be formalized in multi-period settings. In addition to the standard assumption of time-additive expected utility, extensions to habit formation, state-dependent preferences, and recursive utility are presented. Later chapters show that these extensions are important in asset pricing models.Less
Asset prices are ultimately determined by the asset supply and demand of individuals and to study that we need to model the preferences of individuals. This chapter presents alternative representations of preferences, from abstract preference relations over utility indices to the more tractable expected utility criterion. The axioms supporting the use of utility indices or even expected utility are discussed. The important concept of risk aversion and the most frequently used utility functions are introduced together with a discussion of their properties and empirical evidence on preferences. Finally, the chapter explains how preferences can be formalized in multi-period settings. In addition to the standard assumption of time-additive expected utility, extensions to habit formation, state-dependent preferences, and recursive utility are presented. Later chapters show that these extensions are important in asset pricing models.
Lara Buchak
- Published in print:
- 2012
- Published Online:
- September 2012
- ISBN:
- 9780199604760
- eISBN:
- 9780191741548
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199604760.003.0012
- Subject:
- Philosophy, Philosophy of Religion, Metaphysics/Epistemology
This chapter provides an account of what it is to have faith in a proposition p, in both religious and mundane contexts. It is argued that faith in p doesn’t require adopting a degree of belief that ...
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This chapter provides an account of what it is to have faith in a proposition p, in both religious and mundane contexts. It is argued that faith in p doesn’t require adopting a degree of belief that isn’t supported by one’s evidence but rather it requires terminating one’s search for further evidence and acting on the supposition that p. It is then shown, by responding to a formal result due to I. J. Good, that doing so can be rational in a number of circumstances. If expected utility theory is the correct account of practical rationality, then having faith can be both epistemically and practically rational if the costs associated with gathering further evidence or postponing the decision are high. If a more permissive framework is adopted, then having faith can be rational even when there are no costs associated with gathering further evidence.Less
This chapter provides an account of what it is to have faith in a proposition p, in both religious and mundane contexts. It is argued that faith in p doesn’t require adopting a degree of belief that isn’t supported by one’s evidence but rather it requires terminating one’s search for further evidence and acting on the supposition that p. It is then shown, by responding to a formal result due to I. J. Good, that doing so can be rational in a number of circumstances. If expected utility theory is the correct account of practical rationality, then having faith can be both epistemically and practically rational if the costs associated with gathering further evidence or postponing the decision are high. If a more permissive framework is adopted, then having faith can be rational even when there are no costs associated with gathering further evidence.
John Broome
- Published in print:
- 2004
- Published Online:
- October 2005
- ISBN:
- 9780199243761
- eISBN:
- 9780191602900
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/019924376X.003.0005
- Subject:
- Philosophy, Moral Philosophy
This chapter defines a quantitative notion of a person’s lifetime wellbeing. It does so on the basis of betterness among uncertain prospects, using expected utility theory (which the chapter ...
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This chapter defines a quantitative notion of a person’s lifetime wellbeing. It does so on the basis of betterness among uncertain prospects, using expected utility theory (which the chapter explains) and a theorem of John Harsanyi. It adopts the assumption of Daniel Bernoulli that wellbeing is risk-neutral. It gives an account of interpersonal comparisons of wellbeing.Less
This chapter defines a quantitative notion of a person’s lifetime wellbeing. It does so on the basis of betterness among uncertain prospects, using expected utility theory (which the chapter explains) and a theorem of John Harsanyi. It adopts the assumption of Daniel Bernoulli that wellbeing is risk-neutral. It gives an account of interpersonal comparisons of wellbeing.
Harry M. Markowitz
- Published in print:
- 2006
- Published Online:
- January 2009
- ISBN:
- 9780199298839
- eISBN:
- 9780191711480
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199298839.003.0018
- Subject:
- Economics and Finance, History of Economic Thought
This chapter examines a debate with Samuelson regarding which criteria the long-run investor should maximize in their portfolio. It provides the example of receiving either 6% per year with certainty ...
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This chapter examines a debate with Samuelson regarding which criteria the long-run investor should maximize in their portfolio. It provides the example of receiving either 6% per year with certainty or a lottery with an equal chance of 200% gain or 100% log of 1 plus the returns is negative infinity (-∞). Therefore, the investor would choose the certain prospect. The chapter considers whether the long-run investor should follow the arithmetic mean or the log arithmetic (geometric mean) criteria in maximizing its portfolio. It also makes the case for the log model, although Samuelson has argued that because a prospect offers an almost certain probability that does not mean that it must yield a better expected value of utility.Less
This chapter examines a debate with Samuelson regarding which criteria the long-run investor should maximize in their portfolio. It provides the example of receiving either 6% per year with certainty or a lottery with an equal chance of 200% gain or 100% log of 1 plus the returns is negative infinity (-∞). Therefore, the investor would choose the certain prospect. The chapter considers whether the long-run investor should follow the arithmetic mean or the log arithmetic (geometric mean) criteria in maximizing its portfolio. It also makes the case for the log model, although Samuelson has argued that because a prospect offers an almost certain probability that does not mean that it must yield a better expected value of utility.
