Similarity and preferences in the space of simple lotteries.

People violate expected utility theory and this has been traditionally modeled by augmenting its weight-and-add framework by nonlinear transformations of values and probabilities. Yet individuals often use one-reason decision-making when making court decisions or choosing cellular phones, and institutions do the same when creating rules for traffic safety or fair play in sports. We analyze a model of one-reason decision-making, the priority heuristic, and show that it simultaneously implies common consequence effects, common ratio effects, reflection effects, and the fourfold pattern of risk attitude. The preferences represented by the priority heuristic satisfy some standard axioms. This work may provide the basis for a new look at bounded rationality.Keywords Decision making . EVT . EUT . St. Petersburg Paradox Most descriptive theories of decision-making-and certainly those that are variants of expected value theory (EVT) or expected utility theory (EUT)-make the following psychological assumptions:1. Independent evaluations: Every option has a value that is measured by a single number (options are not evaluated relative to other options). 2. Exhaustive search: The value of an option is calculated by using all available information (for gambles, the probabilities and values for all possible outcomes). 3. Trade-offs: To calculate an option's value, low values on one attribute (e.g., a value) can be compensated by high values on another attribute (e.g., a probability).EVT makes two additional assumptions for calculating an option's value:4. Objective probabilities: The probabilities used to calculate an option's value are equal to the objective probabilities (the objective probabilities are not transformed in a nonlinear way).

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“…If not, the model makes no prediction. For extensions, see Aizpurua et al (1993), Leland (1994) and Zilberman (1995, 1999).…”

Section: Remarkmentioning

confidence: 99%

One-Reason Decision-Making: Modeling Violations of Expected Utility Theory

Katsikopoulos¹,

Gigerenzer²

2011

Heuristics

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“…Both prospect theory and mental accounting are instructive for modelling decisions involving risk and uncertainty, but Rubinstein (1988) provides an alternative framework for such decisions that is also founded on simplifying heuristics and so reflects bounded rationality. This work was motivated by the implications of the Allais Paradox for standard expected utility theory, and demonstrated that such behaviour can explain why choice anomalies occur (see also Azipurua et al , 1993; Leland, 1994). Rubinstein (2003), dissatisfied with the hyperbolic discounting approach that has become so popular in behavioural economics – both because of the evidence and the underlying psychological foundations – extended his model of 1988 to situations of intertemporal decision making without uncertainty or risk.…”

Section: Non‐optimizing Solution Strategiesmentioning

confidence: 99%

Modelling Cognitively Bounded Rationality: An Evaluative Taxonomy

Mallard

2011

Journal of Economic Surveys

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Since its origins in the 1950s, the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches. This paper presents a taxonomy by which these approaches can be categorized and understood, evaluating each approach against a range of important criteria. At a time when the foundations of economic theory are being re-examined, this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory, and also of the desirable characteristics of models that incorporate it.

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Decision-making under risk: Editing procedures based on correlated similarities, and preference overdetermination

Uriarte

1999

Review of Economic Design

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Similarity and preferences in the space of simple lotteries.

Cited by 9 publications

References 11 publications

One-Reason Decision-Making: Modeling Violations of Expected Utility Theory

One-Reason Decision-Making: Modeling Violations of Expected Utility Theory

Modelling Cognitively Bounded Rationality: An Evaluative Taxonomy

Decision-making under risk: Editing procedures based on correlated similarities, and preference overdetermination

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