Making Better Decisions. Decision Theory in Practice

  • ID: 2249116
  • Book
  • 232 Pages
  • John Wiley and Sons Ltd
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Making Better Decisions: Decision Theory in Practice introduces readers to some of the principal ideas from decision theory and examines how they might help us make better decisions.

The presentation is designed to appeal to students and the general reader; based on problems, readers are encouraged to imagine a situation, and then make a decision or a judgment. The problems are chosen to exemplify some principles developed in decision theory, as well as violations of these principles derived from the psychological literature. 

Making Better Decisions offers explanations of both the theories we would like to adopt in order to make better decisions, and the theories that explain how those around us behave. In doing so, the book presents crucial insights into the decision–making process that can influence and change our behavior and our ability to interact with those around us.

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Preface viii

Acknowledgments x

1 Background 1

Suggested Reading 5

2 Judgment and Choice Biases 6

Introduction 6

Problems Group A 9

Problems Group B 12

Framing Effects 15

Brainstorming and Formal Models 20

Endowment Effect 22

Sunk Costs 27

Decision Trees 30

Representativeness Heuristic 34

Availability Heuristic 39

Anchoring 44

Mental Accounting 46

Dynamic Inconsistency 51

Exercises 53

3 Consuming Statistical Data 57

Introduction 57

Problems 58

Conditional Probabilities 63

Gambler s Fallacy 72

Biased Samples 77

Regression to the Mean 80

Correlation and Causation 81

Statistical Significance 84

Bayesian and Classical Statistics 85

Exercises 93

4 Decisions under Risk 98

Introduction 98

Problems 99

The Independence Axiom 102

Von Neumann and Morgenstern′s Result 110

Measurement of Utility 113

Risk Aversion 116

Prospect Theory 123

Exercises 130

5 Decisions under Uncertainty 133

Introduction 133

Problems 134

Subjective Probability 141

Learning From the Fact We Know 151

Causality 163

The Sure Thing Principle 166

Alternative Models 171

Objective Probabilities 172

Exercises 174

6 Well–Being and Happiness 178

Introduction 178

Problems Group A 179

Problems Group B 180

Measurement Issues 184

What′s Happiness? 186

Exercises 188

Appendix A: Optimal Choice 191

Appendix B: Probability and Statistics 195

Solutions 204

Index 210

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Itzhak Gilboa is a chaired Professor in the Department of Economics and Decision Sciences at HEC, Paris and in the Eitan Berglas School of Economics at Tel Aviv University, and Fellow of the Cowles Foundation at Yale University. He previously held the position of chaired Professor at the Kellogg School of Management at Northwestern University. Gilboa s research focuses on decision under uncertainty. He has worked with David Schmeidler on axiomatic foundation of non–Bayesian decision theory and contributed to research in complexity in game theory, evolutionary game theory, and social choice. He is co–author ofA Theory of Case–Based Decisions (with David Schmeidler, 2001), and author ofTheory of Decision under Uncertainty (2009) and ofRational Choice (2010).
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