ENSAE Paris - École d'ingénieurs pour l'économie, la data science, la finance et l'actuariat

Decision-making under uncertainty: theory, experiments, and applications

Objectif

The aim of this course is to present an overview of the main developments in decision theory up to today’s research frontier. We start with classical utility theory and study its descriptive and normative validity. We then present newer developments that accommodate some of the observed deviations from the classical theory. We study the normative appeal of these deviations and argue that many of them cannot be regarded as irrational. We therefore discuss more encompassing notions of rationality and distinguish them from models of bounded rationality as well as psychological biases. Applications to macroeconomics, financial markets, and marketing will be discussed.

 

This course is closed in the academic year 2022-23. 

Plan

KEY TOPICS:

  •  Basic notions of order theory and preference relations 
  • Decision under certainty: utility maximization
  • Choice Theory: Weak Axiom of Revealed Preferences and utility characterization
  •  Choice under risk: von Neumann and Morgenstern's Expected Utility
  • Choice under uncertainty: Subjective Expected Utility (de Finetti, Savage, and AnscombeAumann models)
  •  Experimental violations of Subjective Expected Utility
  •  Generalizations: Ambiguity models (Choquet and Maxmin Expected Utility)
  • Generalizations: Incomplete preferences under uncertainty (Bewley model)

OPTIONAL TOPICS:  

  • Case-based decision theory
  •  Dynamic choices and updating/learning
  • Models of unawareness
  • Menu-choice models: demand for flexibility, role of temptation and desire for self-control

Références

There is no required book. But, standard references are:

  •      D. Kreps, Notes on the Theory of Choice, Westview, 1988
  •  L. J. Savage, The Foundations of Statistics, Dover, 1954 (not an easy read)

The following references should help providing a general overview of decision theory:

  •    I. Gilboa, Theory of Decision under Uncertainty, Cambridge, 2009
  •  E. Dekel and B. Lipman (2010), How (not) to do decision theory, Annual Review of Economics, 2, 257-82
  • F. Gul and W. Pesendorfer 2008, The case for mindless economics, in The Foundations of Positive and Normative Economics: A Handbook, A. Caplin and A. Schotter eds., Oxford 

An optional reading list of research papers for topics covered in class as well as additional topics will be provided.