Subject
Behavioural Economics
What happens to a theory of choice when its predictions are tested against how people actually choose. Expected utility is a representation theorem, so it permits any attitude to risk and is refuted only by a pattern no utility function reproduces. Such patterns exist, the demonstration is algebraic rather than statistical, and the models built to accommodate them describe behaviour without thereby endorsing or condemning it.
Learning paths
Behavioural Economics
Testing a theory of choice against patterns of preference, and reading what a descriptive model does and does not establish.
What this subject develops
Test a choice pattern against a decision theory
Derive from stated preferences the constraints they impose on a utility function, and determine whether any function satisfies them all.
See detailed outcomes
Test a choice pattern against a decision theory
- The learner can compute the expected value of a prospect, derive the inequality a stated preference imposes on a utility function, demonstrate that a common-consequence pair of preferences admits no solution, and distinguish a violation of the theory's axioms from mere risk aversion or from a taste the theory permits.
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