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A General Theory of Decision Making

Author

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  • Frank Hansen

    (Institute of Economics, University of Copenhagen)

Abstract

We formulate a general theory of decision making based on a lattice of observable events, and we exhibit a large class of representations called the general model. Some of the representations are equivalent to the so called standard model in which observable events are modelled by an algebra of measurable subsets of a state space, while others are not compatible with such a description. We show that the general model collapses to the standard model, if and only if an additional axiom is satisfied. We argue that this axiom is not very natural and thus assert that the standard model may not be general enough to model all relevant phenomena in economics. Using the general model we are (as opposed to Schmeidler [18]) able to rationalize Ellsberg's paradox without the introduction of non-additive measures.

Suggested Citation

  • Frank Hansen, 2003. "A General Theory of Decision Making," FRU Working Papers 2004/02, University of Copenhagen. Department of Economics. Finance Research Unit.
  • Handle: RePEc:kud:kuiefr:200402
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    File URL: http://www.econ.ku.dk/FRU/WorkingPapers/PDF/2004/2004_02.pdf
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    More about this item

    Keywords

    theory of decision making; Ellsberg's paradox;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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