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What Common Ground Exists for Descriptive, Prescriptive, and Normative Utility Theories?

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  • R. Duncan Luce

    (Institute for Mathematical Behavioral Sciences and Department of Cognitive Sciences, University of California, Irvine, California 92717)

  • Detlof von Winterfeldt

    (Institute of Safety and Systems Management, University of Southern California, Los Angeles, California 92651)

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    Abstract

    Descriptive and normative modeling of decision making under risk and uncertainty have grown apart over the past decade. Psychological models attempt to accommodate the numerous violations of rationality axioms, including independence and transitivity. Meanwhile, normatively oriented decision analysts continue to insist on the applied usefulness of the subjective expected utility (SEU) model. As this gap has widened, two facts have remained largely unobserved. First, most people in real situations attempt to behave in accord with the most basic rationality principles, even though they are likely to fail in more complex situations. Second, the SEU model is likely to provide consistent and rational answers to decision problems within a given problem structure, but may not be invariant across structures. Thus, people may be more rational than the psychological literature gives them credit for, and applications of the SEU model may be susceptible to some violations of invariance principles. This paper attempts to search out the common ground between the normative, descriptive, and prescriptive modeling by exploring three types of axioms concerning structural rationality, preference rationality, and quasi-rationality. Normatively the first two are mandatory and the last, suspect. Descriptively, all have been questioned, but often the inferences involved have confounded preference and structural rationality. We propose a prescriptive view that entails full compliance with preference rationality, modifications of structural rationality, and acceptance of quasi-rationality to the extent of granting a primary role to the status quo and the decomposition of decision problems into gains and losses.

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    File URL: http://dx.doi.org/10.1287/mnsc.40.2.263
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 40 (1994)
    Issue (Month): 2 (February)
    Pages: 263-279

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    Handle: RePEc:inm:ormnsc:v:40:y:1994:i:2:p:263-279

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    Related research

    Keywords: decision analysis; prescriptive utility; rank-dependent utility; sign-dependent utility;

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    Cited by:
    1. Knudsen, Thorbjørn, 2008. "Reference groups and variable risk strategies," Journal of Economic Behavior & Organization, Elsevier, vol. 66(1), pages 22-36, April.
    2. Wakker, Peter P. & Zank, Horst, 2002. "A simple preference foundation of cumulative prospect theory with power utility," European Economic Review, Elsevier, vol. 46(7), pages 1253-1271, July.
    3. Sarin, R. & Wakker, P.P., 1996. "A Single-Stage Approach to Anscombe and Aumann's Expected Utility," Discussion Paper 1996-45, Tilburg University, Center for Economic Research.
    4. Heller, Yuval, 2012. "Justifiable choice," Games and Economic Behavior, Elsevier, vol. 76(2), pages 375-390.
    5. repec:icr:wpmath:05-2013 is not listed on IDEAS
    6. Marek Hudík, 2013. "Macaulay’s Problem," ICER Working Papers 01-2013, ICER - International Centre for Economic Research.
    7. Birnbaum, Michael H. & Gutierrez, Roman J., 2007. "Testing for intransitivity of preferences predicted by a lexicographic semi-order," Organizational Behavior and Human Decision Processes, Elsevier, vol. 104(1), pages 96-112, September.
    8. Konstantinos V. Katsikopoulos, 2009. "Coherence and correspondence in engineering design: informing the conversation and connecting with judgment and decision-making research," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 4(2), pages 147-153, March.
    9. Regenwetter, Michel & Marley, A. A. J. & Grofman, Bernard, 2002. "A general concept of majority rule," Mathematical Social Sciences, Elsevier, vol. 43(3), pages 405-428, July.

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