Lecture 2

Question 1

4 steps of presentation of decision model?

Answer 1

1) specify subjective parameters and the formula constructing the preferences
2) assign numerical values to parameters tf -> preferences
3) use preferences to determine ranges for subjective parameters
4) axioms preference conditions

(Note: steps 2-4 can happen in any order)

Question 2

What does step 4 ensure? (2)

Answer 2

Ensures decision model doesn’t yield contradicted preferences/decisions

Ensures preferences don’t derive contradicted parameter values

Question 3

2 natural preference conditions and what they mean?

Answer 3

Monotonicity = preferring more of a good to less of a good

Transitivity = consistent preferences

Question 4

Difference between strong and weak monotonicity?

Answer 4

Strong - the preferred bundle has to have more of one good and at least the same of the others

Weak - the preferred bundle has to have more of every good

Question 5

What does homeomorphic mean?

Answer 5

That both empirical phenomena and the underlying process match reality

Question 6

What does paramorphic mean?

Answer 6

Describes empirical phenomena of interest correctly, but the process underlying the empirical phenomena are not matched by the process in the model

Question 7

3 types of decisions and examples of what they are?

Answer 7

Individual - risk
Strategy - game theory
Group - social choice theory

Question 8

What does descriptive decision theory do?

Answer 8

It seeks to find out how decisions are made in the real world

Question 9

What does normative decision theory do?

Answer 9

It seeks to find out how decisions ought to be made ideally