Franz Dietrich (CNRS): “Decisions under uncertainty with variable concepts of outcomes and states”

Abstract: A notorious problem with Savage’s decision theory and much of the literature on decisions under uncertainty is the reliance on ready-made and fixed concepts of outcomes and states. Real decision makers first of all need to form such concepts before even beginning to engage into expected-utility reasoning. Worse, a real agent’s concepts of outcomes and states – that is, his ontology – are far from fixed: they vary and can be more or less fine-grained, depending on framing effects, and more generally on the context. In this paper, I introduce a “context-dependent Savage framework”, in which I then propose six plausible Savage-style axioms on preferences. I prove that these axioms imply that the agent decides following the expected utility rule, where the agent’s utility and probability functions can vary, albeit in a systematic, non-arbitrary way. Although important parts of beliefs (probabilities) and desires (utilities) remain stable, the model can explain choice reversals. Savage’s classic theorem emerges in the special case of a single context, i.e., fixed outcome/state concepts.

Franz Dietrich is Research Professor (Directeur de Recherche) at Paris School of Economics, Centre d’Economie de la Sorbonne, CNRSA.

A working paper by Prof Dietrich on a related topic is available here.

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