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On the Foundations of Decision Theory

Author

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  • Ken Binmore

    (Bristol University)

Abstract

Bayesian decision theory was invented by Leonard Savage, who is on record as saying that it would be “preposterous” and “utterly ridiculous” to apply his theory except in a small world. But modern Bayesians proceed as though Savage’s theory is always the rational way to make choices in all circumstances. What is a small world? Why did Savage restrict his theory to small worlds? Where did Savage think priors come from? What are the implications for behavioral applications? How could Savage’s theory be generalized to apply to at least some large worlds? This paper offers some partial answers to such questions.

Suggested Citation

  • Ken Binmore, 2017. "On the Foundations of Decision Theory," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 34(4), pages 259-273, December.
    • Handle: RePEc:spr:homoec:v:34:y:2017:i:4:d:10.1007_s41412-017-0056-1
    DOI: 10.1007/s41412-017-0056-1
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    References listed on IDEAS

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    1. Gary Charness & Edi Karni & Dan Levin, 2013. "Ambiguity attitudes and social interactions: An experimental investigation," Journal of Risk and Uncertainty, Springer, vol. 46(1), pages 1-25, February.
    2. Alex Voorhoeve & Ken Binmore & Arnaldur Stefansson & Lisa Stewart, 2016. "Ambiguity attitudes, framing, and consistency," Theory and Decision, Springer, vol. 81(3), pages 313-337, September.
    3. Ken Binmore, 2016. "A minimal extension of Bayesian decision theory," Theory and Decision, Springer, vol. 80(3), pages 341-362, March.
    4. Dale O. Stah, 2014. "Heterogeneity of Ambiguity Preferences," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 609-617, October.
    5. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, March.
    6. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    7. Voorhoeve, Alex & Binmore, Ken G & Stefansson, Arnaldur & Stewart, Lisa, 2016. "Ambiguity attitudes, framing, and consistency," LSE Research Online Documents on Economics 65577, London School of Economics and Political Science, LSE Library.
    8. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    9. Ken Binmore & Lisa Stewart & Alex Voorhoeve, 2012. "How much ambiguity aversion?," Journal of Risk and Uncertainty, Springer, vol. 45(3), pages 215-238, December.
    10. Itzhak Gilboa, 2004. "Uncertainty in Economic Theory," Post-Print hal-00756317, HAL.
    11. Friedman, Daniel & Isaac, R. Mark & James, Duncan & Sunder, Shyam, 2014. "Risky Curves: On the Empirical Failure of Expected Utility," Santa Cruz Department of Economics, Working Paper Series qt87v8k86z, Department of Economics, UC Santa Cruz.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Max Albert, 2017. "How Bayesian Rationality Fails and Critical Rationality Works," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 34(4), pages 313-341, December.
    2. Yudi Pawitan & Gabriel Isheden, 2020. "Resolving Zeckhauser’s paradox," Theory and Decision, Springer, vol. 88(4), pages 595-607, May.
    3. Katzenstein, Peter J., 2022. "Of Gardens, Forests, and Parks," EconStor Open Access Book Chapters, in: Uncertainty and Its Discontents: Worldviews in World Politics, pages 279-352, ZBW - Leibniz Information Centre for Economics.
    4. Naudé, Wim, 2023. "Artificial Intelligence and the Economics of Decision-Making," IZA Discussion Papers 16000, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Bayesian decision theory; Bayesianism; Leonard Savage; Small worlds; Ellsberg paradox; Imprecise probability;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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