Savage Axioms Of Rationality Flashcards
Explain the savage axioms of rationality
The savage Axioms of rationality are a set of axioms proposed by economist Leonard J Savage, to describe rational decision-making under uncertainty.
These axioms are based on the assumption that individuals are rational and self-interested, and that they make decisions based on their own preferences and the available information.
The axioms are, completeness, which means that an individual is able to make a decision about any pair of alternatives. Transitivity: If an individual prefers A to B, and B to C, then they also prefer A to C. Independence: The individual’s preferences between two alternatives are not affected by the addition or removal of other alternatives. Positivity: The individual strictly prefers one alternative to another if and only if they strictly prefer one attribute of the first alternative to the corresponding attribute of the second alternative.
discuss evidence of violations of these in practice. In particular, comment on the allais and Ellsberg paradoxes.
the savage axioms have been criticised for not accuratly describing real-world decision making and there are violations of these in practice.
for example, the allais paradox and the Ellsberg paradox demonstrate situations where peoples choices violate the axioms.
in the allias paradox, people are asked to choose between two gambles with different probability distributions. the first gamble offers a small certain gain while the second offers a larger gain with some probability and a small gain with the remaining probability. a rational decision maker following the axioms would always choose the first gamble, but many people choose the second.
in the Ellsberg paradox, people are asked to choose between two gambles with ambiguous probability distributions. the first gamble offers a small gain with some probability and a small loss with the remaining probability. the second offers a larger gain with some probability and a larger loss with the remaining probability. a rational decision maker following the independence axiom would not be influenced by the fact that one gamble os ambiguous, and the other is not, but many people are more risk averse when faced with ambiguous probability distributions.
these examples show that peoples decision making often deviates from the predictions of the savage axioms.
