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Standard decision theory and prospect theory: Philosophical considerations regarding theoretical change

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  • Gustavo Marqués

    ()
    (Centro de Investigaciones en Epistemología de las Ciencias Económicas (CIECE), Facultad de Ciencias Económicas, Universidad de Buenos Aires; Facultad de Ciencias Económicas, Universidad Nacional de Lomas de Zamora. Ciudad de Buenos Aires, Argentina.)

  • Diego Weisman

    ()
    (Centro de Investigaciones en Epistemología de las Ciencias Económicas (CIECE), Facultad de Ciencias Económicas, Universidad de Buenos Aires; Consejo Nacional de Investigaciones Científicas y Técnicas (CONICET). Ciudad Autónoma de Buenos Aires, Argentina.)

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    Abstract

    The paper shows the main problems faced by Expected Utility Theory, focusing on the sort of conceptual change introduced by Prospect Theory and suggesting that it could be characterized as a case of incommensurability in the Kuhnean sense. The impact that the coexistence of two rival visions about decisions under risk could have on economics is also evaluated. It is suggested that conventional decision theory could be the base of standard economics (interpreted as normative economics), while prospective theory can contribute to the development of a more descriptive oriented economics. Some of the philosophical consequences resulting from the theoretical change generated by Prospect Theory are also considered. Particularly, it is examined the proposal of biologic and psychological mechanisms for explaining decision making processes and the search of a broader (substantive) conception of rationality, the issue of methodological individualism and the non-interventionist approach associated with it.

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    Bibliographic Info

    Article provided by Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela in its journal Economía.

    Volume (Year): 36 (2011)
    Issue (Month): 31 (January-june)
    Pages: 55-83

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    Handle: RePEc:ula:econom:v:36:y:2011:i:31:p:55-83

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    Postal: Facultad de Ciencias Económicas y Sociales. Instituto de Investigaciones Económicas y Sociales. Campus Universitario Liria, Edificio G, Tercer Nivel. Mérida 5101, Estado Mérida, Venezuela
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    Web page: http://iies.faces.ula.ve/
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    Related research

    Keywords: Decision theory; theoretical change; prospect theory.;

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    1. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
    2. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
    3. Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
    4. Daniel Kahneman & Robert Sugden, 2005. "Experienced Utility as a Standard of Policy Evaluation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(1), pages 161-181, 09.
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    7. Hausman,Daniel M., 1992. "The Inexact and Separate Science of Economics," Cambridge Books, Cambridge University Press, number 9780521425230, October.
    8. Hausman,Daniel M., 1992. "The Inexact and Separate Science of Economics," Cambridge Books, Cambridge University Press, number 9780521415019, October.
    9. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
    10. Elster, Jon, 1996. "Rationality and the Emotions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1386-97, September.
    11. Milton Friedman & L. J. Savage, 1952. "The Expected-Utility Hypothesis and the Measurability of Utility," Journal of Political Economy, University of Chicago Press, vol. 60, pages 463.
    12. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
    13. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
    14. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
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