4. Dynamic Decisions Flashcards
What is the standard theory of static decision making?
Expected utility theory
What is static choice?
Selecting an optimal alternative from some choice set subject to constraint
What is a dynamic decision?
Decisions which form part of a sequence of moves
What are standard assumptions of decision trees?
Reduction of compound lotteries
Forward thinking rationality
Dynamic consistency
What does reduction of compound lotteries mean?
Compound risks are converted to simple ones by using usual rules of probability. It assumes individuals are indifferent between any compound lottery and the simple one that arises from application of reduction
What does forward thinking rationality mean?
The only relevant considerations at any point in a tree are the parts ahead of them not behind them
What is dynamic consistency?
The requirement that an agent’s plans for action at any choice node in a decision tree coincide with their preferred choice should they reach the node
What was the aim of Cubbit, starmer and sugden in 1998?
Investigate which dynamic consistency principles are violated and examine what sort of model needed to accommodate actually observed violations of dynamic consistency
What is timing independence?
It is closely related to dynamic consistency. It is the equivalence of prior and pre commitment problems
What is frame independence?
The way a problem is worded or phrased won’t effect the decision of the decision maker
What was the main finding of Cubbit, starmer, sugden in 1998?
Time independence is the principle that typically fails since the biggest jump in risky behaviour comes between problem 2 and problem 3
What are possible interpretations of why people aren’t time independent?
- Pre commitment device- agent knows if they survived initial risk they would want to choose the safe play but the pre commitment allows them to override this
- Prediction failure- agent in pre commit problem fails to realise they will want to play safe having survived the risk
