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Randomization vs. Selection: How to Choose in the Absence of Preference?

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  • Eric Danan

    ()
    (Université de Cergy-Pontoise, THEMA, 95000 Cergy-Pontoise, France)

Abstract

Decision makers sometimes have to choose between alternative options about which they have no preference: either they judge the options equally valuable (indifference) or they have no judgment about their relative value (noncomparability). Choosing randomly is generally considered a natural way to deal with such situations. This paper shows, however, that systematic randomization between noncomparable options may lead to a chain of decisions resulting in monetary losses (a money pump). Furthermore, these losses can be avoided by deliberately selecting one of the noncomparable options instead of randomizing. Thus, randomization among noncomparable options is costly relative to deliberate selection. On the other hand, randomization among indifferent options is costless relative to deliberate selection.

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File URL: http://dx.doi.org/10.1287/mnsc.1090.1116
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 56 (2010)
Issue (Month): 3 (March)
Pages: 503-518

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Handle: RePEc:inm:ormnsc:v:56:y:2010:i:3:p:503-518

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Keywords: randomization; selection; money pump; indifference; noncomparability;

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References

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  1. Mandler, Michael, 2005. "Incomplete preferences and rational intransitivity of choice," Games and Economic Behavior, Elsevier, vol. 50(2), pages 255-277, February.
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  8. Enrico Diecidue, 2006. "Deriving Harsanyi’s Utilitarianism from De Finetti’s Book-Making Argument," Theory and Decision, Springer, vol. 61(4), pages 363-371, December.
  9. Dan Ariely & George Loewenstein & Drazen Prelec, 2003. ""Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 73-105, February.
  10. Efe A. Ok & Pietro Ortoleva & Gil Riella, 2012. "Incomplete Preferences Under Uncertainty: Indecisiveness in Beliefs versus Tastes," Econometrica, Econometric Society, vol. 80(4), pages 1791-1808, 07.
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Cited by:
  1. Özgür Evren, 2012. "Scalarization Methods and Expected Multi-Utility Representations," Working Papers w0174, Center for Economic and Financial Research (CEFIR).
  2. Rohan Dutta & Sean Horan, 2013. "Inferring Rationales from Choice : Identification for Rational Shortlist Methods," Cahiers de recherche 09-2013, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Gerasimou, Georgios, 2010. "Rational indecisive choice," MPRA Paper 25481, University Library of Munich, Germany.
  4. Gerasimou, Georgios, 2012. "Asymmetric Dominance, Deferral and Status Quo Bias in a Theory of Choice with Incomplete Preferences," MPRA Paper 40097, University Library of Munich, Germany.
  5. Nascimento, Leandro, 2012. "The ex-ante aggregation of opinions under uncertainty," Theoretical Economics, Econometric Society, vol. 7(3), September.
  6. Evren, Özgür & Ok, Efe A., 2011. "On the multi-utility representation of preference relations," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 554-563.
  7. Chen Li & Zhihua Li & Peter Wakker, 2014. "If nudge cannot be applied: a litmus test of the readers’ stance on paternalism," Theory and Decision, Springer, vol. 76(3), pages 297-315, March.

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