PHPE 400 Individual and Group Decision Making Eric Pacuit - PowerPoint PPT Presentation

PHPE 400 Individual and Group Decision Making Eric Pacuit University of Maryland 1 / 14

Evaluating Rational Choice Axioms What should we make of the patterns found by psychologists and behavioral economists? Are these descriptive issues relevant for decision theory or rational choice theory? 2 / 14

Evaluating Rational Choice Axioms What should we make of the patterns found by psychologists and behavioral economists? Are these descriptive issues relevant for decision theory or rational choice theory? Any apparent violation of an axiom of the theory can always be interpreted in three different ways: 1. the subjects’ preferences genuinely violate the axioms of the theory; 2 / 14

Evaluating Rational Choice Axioms What should we make of the patterns found by psychologists and behavioral economists? Are these descriptive issues relevant for decision theory or rational choice theory? Any apparent violation of an axiom of the theory can always be interpreted in three different ways: 1. the subjects’ preferences genuinely violate the axioms of the theory; 2. the subjects’ preferences have changed during the course of the experiment; 2 / 14

Evaluating Rational Choice Axioms What should we make of the patterns found by psychologists and behavioral economists? Are these descriptive issues relevant for decision theory or rational choice theory? Any apparent violation of an axiom of the theory can always be interpreted in three different ways: 1. the subjects’ preferences genuinely violate the axioms of the theory; 2. the subjects’ preferences have changed during the course of the experiment; 3. the experimenter has overlooked a relevant feature of the context that affects the the subjects’ preferences. 2 / 14

Aim of rational choice theory ◮ Recommendation ◮ Prediction ◮ Explanation 3 / 14

Recommending Behavior ◮ One the one hand, that fact that many people have faulty reasoning about probabilities or deviate from EU theory does not mean that the theories are wrong (Hume’s Law: is does not imply can ). It could simply be that people are not naturally good at all kinds of reasoning, which is part of the reason why we study rational choice in the first place. 4 / 14

Recommending Behavior ◮ One the one hand, that fact that many people have faulty reasoning about probabilities or deviate from EU theory does not mean that the theories are wrong (Hume’s Law: is does not imply can ). It could simply be that people are not naturally good at all kinds of reasoning, which is part of the reason why we study rational choice in the first place. ◮ On the other hand, ought does imply can , meaning that if we’re going to say that people should follow EU theory, it needs to be possible that they actually do so. 4 / 14

Recommending Behavior ◮ One the one hand, that fact that many people have faulty reasoning about probabilities or deviate from EU theory does not mean that the theories are wrong (Hume’s Law: is does not imply can ). It could simply be that people are not naturally good at all kinds of reasoning, which is part of the reason why we study rational choice in the first place. ◮ On the other hand, ought does imply can , meaning that if we’re going to say that people should follow EU theory, it needs to be possible that they actually do so. ◮ The question then becomes, ‘Can people consistently follow EU theory? If not, when and why not?’. 4 / 14

Explaining/Predicting Behavior Stability : Individuals’ preferences are stable over the period of the investigation. 5 / 14

Explaining/Predicting Behavior Stability : Individuals’ preferences are stable over the period of the investigation. Invariance : Individuals’ preferences are invariant to irrelevant changes in the context of making the decision. 5 / 14

Explaining/Predicting Behavior “This shows, I think, that utility theory is a way to formalize and model rational action, but is not itself a complete theory of rational action. To employ utility theory presupposes that we know which are the relevant, and which are the irrelevant, features for evaluating states of affairs. Unless we possess such a criteria we cannot distinguish framing effects from redescribing the world in such a way that we call attention to an important feature. However, only a value and/or moral theory can allow us to do that; utility theory does not imply any specific value or moral theory” (Gaus, p65). 6 / 14

Rational preferences Preferences will be understood as mental rankings of alternatives “all things considered”. 7 / 14

Partial/Total/Overal Comparisons 8 / 14

Partial/Total/Overal Comparisons 1. Lauren drank water rather than wine with dinner, despite preferring to drink wine, because she promised her husband she would stay sober. 8 / 14

Partial/Total/Overal Comparisons 1. Lauren drank water rather than wine with dinner, despite preferring to drink wine, because she promised her husband she would stay sober. 2. Lauren drank water with dinner because she preferred to do so. But for the promise she made her husband to stay sober, she would have preferred to drink wine rather than water with dinner. 8 / 14

A Dilemma Either stick to the “formal axioms” of completeness, transitivity, Independence, etc. and refuse to assume the principles of stability and invariance. 9 / 14

A Dilemma Either stick to the “formal axioms” of completeness, transitivity, Independence, etc. and refuse to assume the principles of stability and invariance. But then rational choice theory will be useless for all explanatory and predictive purposes because people could have fully rational preferences that constantly change or are immensely context-dependent. 9 / 14

A Dilemma Either stick to the “formal axioms” of completeness, transitivity, Independence, etc. and refuse to assume the principles of stability and invariance. But then rational choice theory will be useless for all explanatory and predictive purposes because people could have fully rational preferences that constantly change or are immensely context-dependent. Alternatively, an economists can assume stability and invariance but only at the expense of making rational-choice theory a substantive theory, a theory laden not just with values but with the economist’s values. 9 / 14

Game Theory 10 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. app.pacuit.io/games/avg 11 / 14

The Guessing Game, again Guess a number between 1 & 100. The closest to 2/3 of the average wins. 12 / 14

The Guessing Game, again Guess a number between 1 & 100. The closest to 2/3 of the average wins. app.pacuit.io/games/avg 12 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? 100, 99, ..., 67, ..., 2, 1 13 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? 100, 99, ..., 67, ..., 2, 1 13 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? 100, 99, ..., 67, ..., 2, 1 13 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? ✟✟ ❍❍ 100, 99, ..., 67, ..., 2, 1 13 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? ✟✟ ❍❍ ❩ ✚ 100, ✚ 99, ..., 67, ..., 2, 1 ❩ 13 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? ✟✟ ❍❍ ❩ ✚ ❩ ✚ 100, ✚ 99, ..., ✚ ❩ 67,..., 2, 1 ❩ 13 / 14

The Guessing Game Guess a number between 1 & 100. The closest to 2/3 of the average wins. What number should you guess? ✟✟ ❍❍ ❩ ✚ ❩ ✚ 100, ✚ 99, ..., ✚ 67, ..., ✁ ✁ ❆ ❆ ❩ ❩ 2, 1 13 / 14

Traveler’s Dilemma 1. You and your friend write down an integer between 2 and 100 (without discussing). 14 / 14

Traveler’s Dilemma 1. You and your friend write down an integer between 2 and 100 (without discussing). 2. If both of you write down the same number, then both will receive that amount in dollars from the airline in compensation. 14 / 14

Traveler’s Dilemma 1. You and your friend write down an integer between 2 and 100 (without discussing). 2. If both of you write down the same number, then both will receive that amount in dollars from the airline in compensation. 3. If the numbers are different, then the airline assumes that the smaller number is the actual price of the luggage. 14 / 14

Traveler’s Dilemma 1. You and your friend write down an integer between 2 and 100 (without discussing). 2. If both of you write down the same number, then both will receive that amount in dollars from the airline in compensation. 3. If the numbers are different, then the airline assumes that the smaller number is the actual price of the luggage. 4. The person that wrote the smaller number will receive that amount plus $2 (as a reward), and the person that wrote the larger number will receive the smaller number minus $2 (as a punishment). 14 / 14