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States of Nature and States of Mind: A Generalised Theory of Decision-Making, evaluated by application to Human Capital Development

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  • Iain Embrey

Abstract

Canonical economic agents act so as to maximise a single, representative, utility function. However there is accumulating evidence that heterogeneity in thought-processes may be an important determinant of individual behaviour. This paper investigates the implications of a vector-valued generalisation of the Expected Utility paradigm, which permits agents either to deliberate as per Homo-economics, or to act impulsively. That generalised decision theory is applied to explain irrational educational investment decisions, persistent social inequalities, the crowding-out effect, the pervasive influence of non-cognitive ability on socio-economic outcomes, and the dynamic relationships between non-cognitive ability, cognitive ability, and behavioural biases. These results suggest that the generalised decision theory warrants further investigation.

Suggested Citation

  • Iain Embrey, 2017. "States of Nature and States of Mind: A Generalised Theory of Decision-Making, evaluated by application to Human Capital Development," Working Papers 209919485, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:209919485
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