Decision theory and decision behaviour. Normative and descriptive approaches (Q1188814)

A principle theme of this book for third and fourth year students is the relationship between normative and descriptive decision theory. Normative decision theory addresses itself to the question of how people ought to make decisions in various types of situations, if they wish to be regarded as `rational'. Descriptive decision theory purports to describe how people actually make decisions in a variety of situations. The author deals with decision situations involving a single actor in part I (chapter 1-8). In part II (chapter 9-14) non-cooperative games are treated. In part III (chapter 15-20) he regards collective decisions. Decisions under partial information, econometric methods together with decisions under partial information for describing the future outcomes and searching for an optimal action are not regarded. Part I, chapter 1 treats orders and scales. It starts with binary relations, orders induced by a preference relation, followed by utilities determined on a ratio scale, and finishes with the construction of a ratio scale of preference. Chapter 2 (optimization) begins with an optimization problem of an objective function L: \({\mathbb{R}}^ m\to {\mathbb{R}}\), where the Hessian matrix of L(u) can be determined. It follows optimization under constraints, where in a decision problem control (or decision) variables and state variables are involved. The objective function is of the form L(x,u), where the vector x represents the state variables, and the vector u the control (or decision) variables. The constraint vector will be f with \(f(x,u)=0\). The Hamiltonian function \(H(x,u,\lambda)=L(x,u)+\lambda f(x,u)\) is regarded too (\(\lambda\) is a vector). Then the author discusses linear objective functions and linear constraints. Linear programming is used to solve such problems. The simplex method is described. For too complex optimization problems of practical interest the method of steepest descent (or ascent) is treated. Dynamic extensions of minimizing or maximizing a given objective function (that means: the introduction of the time dimension) leads to problems of control. The constraints in a continuous problem of control are expressed by a system of differential equations \(\dot x(t)=f(x(t),u(t),t)\). Dynamic programming is illustrated by an example. Chapter 3 deals with decision under uncertainty, where the decision maker ignores completely the relative likelihoods with which the various states of nature may obtain. Some decision rules are described and compared. Some aspects of behaviour in decision situations under uncertainty are regarded. Chapter 4 treats decisions under risk. After some examples and paradoxes the value of information is regarded. Then follow sequential decisions and probabilistic information, general two-step decision processes, conjugate probability measures and statistical decisions. Chapter 5 describes subjective aspects of risk. After an introduction misconceptions about risk, assessment of subjective probabilities, and pejorative connotations of risk are treated. Chapter 6 regards multi-objective decisions. After formal axioms establishing the existence of summable utilities the linear regression model is described, followed by the lexicographic ordering, an application of the EBA (eleminating by aspects) model, and the matching problem. Chapter 7 regards the theory of social choice. After the axiomatization of desiderata of a social choice rule, and Arrow's impossibility theorem, the liberalism paradox is treated followed by alternative approaches to the problem of social choice and Condorcet functions. Chapter 8 treats individual psychology of decision making as cognitive dissonance, conflict decision theory as an extension of cognitive dissonance theory, and limitations of freedom of choice. Part II (non-cooperative games) starts with two-person constant (or zero) sum games in chapter 9. After an introduction to the problem the simplex method is used for solving such games followed by intuitive approaches to solutions. It finishes with remarks on the theoretical importance of two- person constant (or zero) sum games. Chapter 10 deals with some topics in continuous games, such as games of timing, differential games, and some interesting examples of differential games. Chapter 11 treats two-person non-constant sum games. In the introduction the problem is described. The chicken game and the prisoner's dilemma is illustrated. The stability is regarded. It follows a comparison of performances in iterated prisoner's dilemma and chicken, valuable and invaluable equilibria, the index of exploitation, and conjectures suggested by results of experiments. Chapter 12 deals with psychological pressures in non-cooperative games. After introductionary remarks types of experiments with \(2\times 2\) games, benevolence and frust, opposite pressure in prisoner's dilemma, psychological pressures in an underdog-topdog game, and non-monotonic pressures in chicken are regarded. Chapter 13 treats the theory of voting. Voting strategies are regarded. The case of the unqualified librarian, sophisticated voting, and the chairman paradoxes are treated. Chapter 14 (social traps) deals with the n-person prisoner's dilemma, the platonia dilemma, and the `end of the world' syndrome. Part III (collective decisions) begins with two-person cooperative games in chapter 15. After an introduction to the problem Zeuthen's model of bargaining and Nash's solution of the two-person cooperative game is treated. The individualistic orientation of Nash's solution follows, together with experiments with \(2\times 2\) cooperative games, other approaches to solutions of cooperative games, and the theory of market games. Chapter 16 treats n-person cooperative games. It starts with a description of the problem and some definitions, for example of the core, stable sets, the Shapley value, the nucleolus, and continues with comparisons of these solution concepts. The author describes a method to calculate the nucleolus. He then gives a comparison of four solutions to the `small market' game, and rationales of the various solution concepts. Chapter 17 (the allocation problem) regards game-theoretic approaches, tests of game-theoretic solutions, and the allocation of aircraft landing fees. Chapter 18 treats indices of power. It regards power of political coalitions, the problem of choosing an index of power, external validity of power indices, power and satisfaction, and finally, the case of proportional representation in electoral systems. Chapter 19 (theories of coalition formation) treats experiments in coalition formation and formation of political coalitions. Chapter 20 (psychology of collective decision-making) deals with amplification of probabilistic preference, the `risk-shift' effect, and quality of group decisions in real life situations.