Erkenntnis 79 (S6):1091-1117 (2014)
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Abstract |
The orthodox theory of instrumental rationality, expected utility (EU) theory, severely restricts the way in which risk-considerations can figure into a rational individual's preferences. It is argued here that this is because EU theory neglects an important component of instrumental rationality. This paper presents a more general theory of decision-making, risk-weighted expected utility (REU) theory, of which expected utility maximization is a special case. According to REU theory, the weight that each outcome gets in decision-making is not the subjective probability of that outcome; rather, the weight each outcome gets depends on both its subjective probability and its position in the gamble. Furthermore, the individual's utility function, her subjective probability function, and a function that measures her attitude towards risk can be separately derived from her preferences via a Representation Theorem. This theorem illuminates the role that each of these entities plays in preferences, and shows how REU theory explicates the components of instrumental rationality.
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Keywords | decision theory expected utility theory risk-weighted expected utility theory risk rationality representation theorems Savage axioms tradeoff consistency Allais paradox instrumental rationality |
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Reprint years | 2014 |
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DOI | 10.1007/s10670-013-9542-4 |
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References found in this work BETA
Subjective Probability and Expected Utility Without Additivity.David Schmeidler - 1989 - Econometrica 57:571-589.
Prospect Theory: An Analysis of Decision Under Risk.D. Kahneman & A. Tversky - 1979 - Econometrica: Journal of the Econometric Society:263--291.
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Citations of this work BETA
A Dutch Book Theorem for Quantificational Credences.Benjamin Lennertz - 2017 - Ergo: An Open Access Journal of Philosophy 4.
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