ronaldweinland.info Handbooks NOTES ON THE THEORY OF CHOICE PDF

NOTES ON THE THEORY OF CHOICE PDF

Sunday, January 12, 2020 admin Comments(0)

These notes outline the standard economic model of rational choice in decision- making. comparative statics predictions of the choice theory – the qualitative. In these notes, I will summarize the basic ideas in choice theory, which you must be choice function that satisfies the weak axiom of revealed preference. von Neumann%Morgenstern Theory (objective probabilities). % Savage Theory Kreps, D. M. (): Notes on the Theory of Choice, Underground Classics.


Author:ROSAURA TREFTZ
Language:English, Spanish, Indonesian
Country:Turkey
Genre:Art
Pages:784
Published (Last):26.02.2016
ISBN:629-4-39518-757-9
ePub File Size:24.51 MB
PDF File Size:12.35 MB
Distribution:Free* [*Register to download]
Downloads:26025
Uploaded by: WENONA

In this book, Professor Kreps presents a first course on the basic models of choice theory that underlie much of economic theory. This course. Kreps - Notes on the Theory of Choice - - Ebook download as PDF File .pdf ), Text File .txt) or read book online. Econometrics. single person choice theory”.2 What does this mean? people would agree with this because David Kreps says it - in the introduction to Notes on the Theory of.

Michael I. Ogu Department of Political Science and Public Administration Babcock University, Ogun State, Nigeria Abstract This study reviewed the origin of the rational choice theory and how it came to be adopted as one of the major approaches or paradigms of analysis in the political science sub-field of contemporary political analysis, its basic hypothesis, underlying assumptions, and criticisms of the theory as well as application areas outside the western milieu context. The study adopted the qualitative approach to research, and referenced scholarly text books, articles, journals and monographs in the areas under investigation. The theory arguably, begins, from the viewpoint of the individual, as against viewing various individuals interacting and relating together, social situations, or groups. The emphasis on the individual interest has always been the starting point of the theory, even though some scholars have argued to the contrary. Individuals hardly follow the steps provided in the rational model to reach decisions that they regard as rational.

The things which meet their needs may not be the same for each of them — what matters is that each can put his or her energies into satisfying activities in which they are not in conflict, while postponing a decision on the major conflict. Perhaps Mary wants to do an evening course which will take three months.

Perhaps John wants to join a health club and get into shape. The world never stands still and something may happen in the meantime to resolve the situation that they are most in conflict about — which city to live in. Try it and see. A third approach is to agree to try one solution for a time and then to assess whether it is acceptable to both parties.

So John might agree that they will live in Dublin for four months and then look at the situation again. This approach is common in industrial relations — usually where the union agrees to try out a new work arrangement and the management agrees to a joint review after six months or a year.

Grieving over someone who has died or over a relationship which has irrevocably ended or over a situation which has changed for the worse perhaps children grieving because their parents have split up is an example of a true conflict.

There is a conflict between wanting the old situation and having to live in the new. There is no immediate solution which will resolve the conflict in a satisfactory way. Only time, and doing other things which are satisfying, will heal the grief. False Conflicts There is no true conflict between maintaining my weight at its present level and eating all I like — so long as I am willing to run many miles a day. There is no true conflict between working and studying for a degree — so long as I am prepared to spend my evenings studying and my money on fees instead of other things.

If there is a single behaviour which would resolve it, then the conflict is a false conflict. Perhaps we stay because we are afraid of failure if we try to go it alone, or for the sake of someone else caught in the same bad relationship or because we need the money to educate our children.

So there are good and bad reasons for staying in a false conflict. Good reasons often reflect our values: doing our best for our children, for instance.

Bad reasons may have to do with fear, a poor self-image or a habit of blaming the rest of the world for our problems.

Choice Theory, Reality Therapy and Depression In Reality Therapy and Choice Theory, depression is seen as a way of dealing with the gulf between what we have and what we want. Because depression is seen in this way, Choice Theory always holds out the possibility of overcoming depression.

And, as is clear below, Choice Theory does not see depression as being bad all the time. Sometimes it is better than the alternatives — what is important is not to trap ourselves in depression. What is more important is to know that the path out of depression begins with changing what we want or changing how we behave.

Depression can do four things for us and knowing what these are can help us to begin the climb out into the light. These four things can be thought of under the letters ACHE. A for Anger Depression is often considered an alternative to anger and sometimes it can be better to choose depression than anger. If you make a habit of lashing out when anything goes wrong, you can alienate other people and often make matters worse. Consider how many relationships anger has destroyed.

Consider how many lives anger has destroyed. Anger has its place, and it often gives us the energy for change, or the energy to stand up for ourselves.

But it can be destructive too. Depression can be a safe, temporary alternative to anger. It becomes unsafe when it goes on for too long. C for Control Depression gives us a certain amount of control over people and situations. It may help us to avoid taking risks, to stay in a safe environment. To a certain extent, people will try to avoid upsetting us when we are depressed. If we are absolutely devastated by something that has happened, depression may give us the only control over our lives that we can handle at the time.

The price for this control, however, can be high because of the suffering that comes with depression. By definition, nobody enjoys depression — if we did, it would not be depression. H for Help Depression brings us a certain amount of help. This may be help from friends, from a doctor or from an institution. Some people need this help for a time. Again, if it goes on too long people may stop helping us and in any event depression is a high price to pay for the help we get.

Depression can get us help without us having to ask for it. E for Excuse Depression can excuse us for not doing what we should do. It can be a way of avoiding pain. If I am depressed, how can I be expected to get out and about, dress well, work, face my problems etc? Yet, very often, it is only by doing these things — even, at an extreme, by doing something, anything at all — that I can start to climb out of a depression.

So if I am depressed Choice Theory would say that I can begin to climb out of the depression by taking action. I have no direct control over the feeling of depression.

Kreps - Notes on the Theory of Choice -

I may, if I am in the depths of depression, have little or no control over my thoughts. All I can control is what I do. Maybe all I can do is get out of bed and sit by the window, or get out of bed and go downstairs and that may be enough to start getting the depression to lift.

When I can do a little more, I should try to do something more. Ideally I should focus on small things that I want and that I can get. I may also need to change what I want — in this case to accept that my children will never return to live with me. Is this easy? Our feelings, thoughts and actions are linked but sometimes we have to do something for quite a long time before our feelings follow and become positive.

You might also like: THE TALE OF TWO CITIES PDF

Medication and Depression Dr William Glasser, who developed Reality Therapy, has a great deal to say about medication in his books. He has the qualifications to discuss medication. I do not, and my attitude is that I have nothing useful to contribute on the topic.

But I believe that, whether you are on medication or not, the practice of Choice Theory can make your life better. Let me help you build a simple, easy mindfulness habit. When you sign up you will also receive my 30 Tips for bringing mindfulness to your daily life quickly and easily: Yes, send me a daily mindfulness reminder I have practised mindfulness for over 25 years.

My aim is to make this valuable practice accessible and jargon-free. Got a question? Please contact me now. Within this Marshallian framework, the dependence of utility on attributes naturally leads to the specification of a cardinal utility measure, on which conditions arising from economic theory may be imposed.

For example, it cannot be the case that the price of an alternative has a positive influence on its utility unless price is operating largely as a proxy for quality variables.

In addition to these economic tests, conditions may be applied that arise from behavioural considerations. For example, sign conditions or relative value conditions may be applied to the values of estimated coefficients. Testing models in this way can make a valuable contribution to obtaining models that give good results for whatever objectives the modelling may have.

The model must comply with the triangle inequalities, must not exhibit preference reversal and, therefore, the utility differences of any pair of alternatives must not depend on the characteristics or existence of another alternative.

It is important to note that consistency with RUM does not necessarily imply that behaviour arises from individuals assessing the attributes of the alternatives they face, deriving utilities and choosing the best-performing alternative. According to this interpretation, RUM could encompass a whole range of behavioural processes employed in practice, provided these can be reconciled in some shape or form with utility maximisation subject to constraints. The key benefit of the RUM approach to the study of choice is the link it gives to microeconomics.

Here there is a large body of theory and empirical evidence offering methodology and tests of behaviour. Setting the modelling within such a widely accepted behavioural framework helps in gaining acceptance for the approach, by providing a well-developed discussion of its strengths and weaknesses. For example, while microeconomics provides a sound basis for welfare analysis at the level of the individual, it also draws attention to the difficulty of integrating the measures over a population and presents plausible ways in which this might be done.

It also provides a theoretically acceptable basis for the estimation of willingness-to-pay measures as marginal rates of substitution between the price and other attributes of alternatives. Similarly, for forecasting, RUM offers a credible basis that justifies expectations that individuals may continue to behave in ways that have been observed to date. However, there are numerous examples in the literature of criticisms of the RUM approach, and interest in behavioural features that are not compatible with generally understood interpretations of RUM.

Revisiting consistency with random utility maximisation: theory and implications for practical work

In the following section we discuss a number of these apparent departures in detail, addressing the key issue of whether extensions or adaptations to RUM could accommodate or approximate these features, some more subtle than others. Clearly, our preference is to accommodate more behavioural realism while remaining, if possible, within the RUM framework with all its advantages.

Two general extensions may be mentioned here. First, it is reasonable to use models that may be consistent with utility maximisation only within a defined region; provided that no investigations need to be made outside this region, such models can claim the advantages of RUM.

However, this second extension does not extend the scope of RUM because, in order for the overall model to be RUM-consistent, it is necessary for each of the components to be RUM-consistent. However, as already mentioned in Sect. Kahneman and Tversky ; Tversky and Kahneman It is here that the strong assumptions underlying some of the modelling frameworks can lead to problems.

It should also be noted that the criticisms raised in these literatures seem to refer to the utility maximisation paradigm without recognising that the move to random utility maximisation is in large part motivated by a desire to capture the types of inconsistencies and idiosyncrasies in behaviour discussed above.

Indeed, the field has proactively sought to address some of these concerns, through refinements of and extensions to the set of RUMs. This key paper later led to the growing use of hybrid choice structures see the extensive overview in Abou-Zeid and Ben-Akiva , an approach that has, however, been exploited primarily for accommodating attitudes and perceptions in decision making, rather than some of the behavioural traits we discuss below.

Before turning to the individual phenomena, we focus on the general notion of context dependence, which is of key interest in behavioural economics and mathematical psychology and encompasses many of the issues covered in Sect.

Returning to our earlier discussion concerning sources of randomness in Sect. These departures from the most basic assumption about the error structure can lead to important gains in model performance and may in fact allow the model to accommodate some of the behavioural phenomena that are central to the discussions in behavioural economics and mathematical psychology without explicitly describing them.

While this may not satisfy the desire for behavioural realism, it allows the model to represent the behaviour closely enough to produce good predictions while retaining other benefits inherent to RUM structures.

A key question that an analyst needs to consider in this context is which is most important; the explicit modelling of the behavioural processes or the retention of the microeconomic framework underlying RUM? This is strongly related to the application of the model for valuation and forecasting.

An important component in this is the impact that the context in which a choice is made has on outcome of the choice.

Pdf of theory notes the on choice

As we will see in the later discussion, if the source of this impact is exogenous to the comparison between the alternatives, then consistency with RUM can generally be maintained. This is no longer generally the case when the context effects are driven by the choice set itself. Because there was no easy way to tell whether a mother logit model was consistent with RUM, it did not provide a useful setup for estimating general RUM-consistent models or testing for RUM-consistency.

This list is not meant to be complete and the inclusion of topics is unavoidably selective. Each time, we seek to discuss the behavioural relevance of the topic, the likely impact of not accommodating the phenomenon in our models, and an overview of attempts if any to represent the effect in the choice modelling literature.

With regard to the last point, we specifically look at the implications of such efforts on maintaining consistency with utility maximisation.

We group the phenomena together according to whether or not they are theoretically consistent with RUM. Since then, behavioural economists and psychologists have found salient and robust anchoring effects in both experiments and real world choices.

In the context of the choice modelling literature, the main focus on anchoring effects has been how a previous choice setting can influence preferences in a subsequent choice setting. A key example comes in value of time work, especially where based on stated choice data.

Anchors may form specifically the first time a respondent faces a given type of choice, but subsequent choices may refine the anchor. The influence of anchoring on the value of time has been considered in some depth by VandeKaa An anchor may also be constant formed the first time a respondent faces a particular choice or evolve over time e. If, in each choice situation, the choice is modelled with a RUM structure, then the actual choice is consistent with RUM, but the sequence is not consistent with a single definition of utility, as utility gets redefined over time, either just once for all choices following the initial choice, or after each choice.

Either way, such heterogeneity in valuations over time is not in principle inconsistent with RUM. Such effects are also visible in many stated choice surveys where one or more of the alternatives in a choice task have a zero cost to the respondent, be it in the case of toll road studies e.

The behaviour exhibited by this effect is not consistent with a linear cost sensitivity, which is a core assumption in many applications of choice models. However, it can easily be accommodated through a non-linear specification and does not lead to violations of utility maximisation. Status quo bias Status quo bias refers to the phenomenon that individuals have strong propensity to choose the alternative that describes their current situation.

It was first demonstrated by Samuelson and Zeckhauser , but is commonly observed in many stated choice surveys, especially when the status quo alternative is explicitly labelled as such. The fact that individuals attach undue weight to their current situation does not lead to any issues from a utility maximisation perspective, and is routinely accommodated in models. A different issue of course applies if these models are used in forecasting, where the status quo is unknown. Applications looking at this issue are common in environmental economics, see for example Meyerhoff and Liebe Mental accounting Mental accounting refers to the cognitive process by which individuals allocate their overall money budget into different mental accounts.

It is a common empirical finding that money in one mental account is not a perfect substitute for money in another account, thus violating the principle of fungibility Thaler This effect is commonly observed in transport choice models with multiple cost components e. While this behavioural effect poses issues from an economic theory perspective, it does not pose any particular issues for a theoretical RUM-consistent model of choice behaviour.

Maintaining the analogy to continuous consumption, recognition of this problem has prompted some RUM researchers to adopt the standard Hicksian solution to path dependence e.

Unfortunately, this literature has been slow to develop, and contemporary random utility modelling would seem committed to a Marshallian framework. Within this Marshallian framework, the dependence of utility on attributes naturally leads to the specification of a cardinal utility measure, on which conditions arising from economic theory may be imposed.

For example, it cannot be the case that the price of an alternative has a positive influence on its utility unless price is operating largely as a proxy for quality variables.

Pdf the choice of on notes theory

In addition to these economic tests, conditions may be applied that arise from behavioural considerations. For example, sign conditions or relative value conditions may be applied to the values of estimated coefficients. Testing models in this way can make a valuable contribution to obtaining models that give good results for whatever objectives the modelling may have.

The model must comply with the triangle inequalities, must not exhibit preference reversal and, therefore, the utility differences of any pair of alternatives must not depend on the characteristics or existence of another alternative. It is important to note that consistency with RUM does not necessarily imply that behaviour arises from individuals assessing the attributes of the alternatives they face, deriving utilities and choosing the best-performing alternative.

The theory choice pdf on of notes

According to this interpretation, RUM could encompass a whole range of behavioural processes employed in practice, provided these can be reconciled in some shape or form with utility maximisation subject to constraints. The key benefit of the RUM approach to the study of choice is the link it gives to microeconomics.

Here there is a large body of theory and empirical evidence offering methodology and tests of behaviour. Setting the modelling within such a widely accepted behavioural framework helps in gaining acceptance for the approach, by providing a well-developed discussion of its strengths and weaknesses. For example, while microeconomics provides a sound basis for welfare analysis at the level of the individual, it also draws attention to the difficulty of integrating the measures over a population and presents plausible ways in which this might be done.

It also provides a theoretically acceptable basis for the estimation of willingness-to-pay measures as marginal rates of substitution between the price and other attributes of alternatives. Similarly, for forecasting, RUM offers a credible basis that justifies expectations that individuals may continue to behave in ways that have been observed to date.

However, there are numerous examples in the literature of criticisms of the RUM approach, and interest in behavioural features that are not compatible with generally understood interpretations of RUM. In the following section we discuss a number of these apparent departures in detail, addressing the key issue of whether extensions or adaptations to RUM could accommodate or approximate these features, some more subtle than others.

Clearly, our preference is to accommodate more behavioural realism while remaining, if possible, within the RUM framework with all its advantages. Two general extensions may be mentioned here. First, it is reasonable to use models that may be consistent with utility maximisation only within a defined region; provided that no investigations need to be made outside this region, such models can claim the advantages of RUM. However, this second extension does not extend the scope of RUM because, in order for the overall model to be RUM-consistent, it is necessary for each of the components to be RUM-consistent.

However, as already mentioned in Sect. Kahneman and Tversky ; Tversky and Kahneman It is here that the strong assumptions underlying some of the modelling frameworks can lead to problems. It should also be noted that the criticisms raised in these literatures seem to refer to the utility maximisation paradigm without recognising that the move to random utility maximisation is in large part motivated by a desire to capture the types of inconsistencies and idiosyncrasies in behaviour discussed above.

Indeed, the field has proactively sought to address some of these concerns, through refinements of and extensions to the set of RUMs. This key paper later led to the growing use of hybrid choice structures see the extensive overview in Abou-Zeid and Ben-Akiva , an approach that has, however, been exploited primarily for accommodating attitudes and perceptions in decision making, rather than some of the behavioural traits we discuss below.

Before turning to the individual phenomena, we focus on the general notion of context dependence, which is of key interest in behavioural economics and mathematical psychology and encompasses many of the issues covered in Sect.

Returning to our earlier discussion concerning sources of randomness in Sect. These departures from the most basic assumption about the error structure can lead to important gains in model performance and may in fact allow the model to accommodate some of the behavioural phenomena that are central to the discussions in behavioural economics and mathematical psychology without explicitly describing them.

While this may not satisfy the desire for behavioural realism, it allows the model to represent the behaviour closely enough to produce good predictions while retaining other benefits inherent to RUM structures. A key question that an analyst needs to consider in this context is which is most important; the explicit modelling of the behavioural processes or the retention of the microeconomic framework underlying RUM?

This is strongly related to the application of the model for valuation and forecasting. An important component in this is the impact that the context in which a choice is made has on outcome of the choice. As we will see in the later discussion, if the source of this impact is exogenous to the comparison between the alternatives, then consistency with RUM can generally be maintained.

This is no longer generally the case when the context effects are driven by the choice set itself.

Little Guide to Dr William Glasser’s Choice Theory and Reality Therapy

Because there was no easy way to tell whether a mother logit model was consistent with RUM, it did not provide a useful setup for estimating general RUM-consistent models or testing for RUM-consistency. This list is not meant to be complete and the inclusion of topics is unavoidably selective. Each time, we seek to discuss the behavioural relevance of the topic, the likely impact of not accommodating the phenomenon in our models, and an overview of attempts if any to represent the effect in the choice modelling literature.

With regard to the last point, we specifically look at the implications of such efforts on maintaining consistency with utility maximisation. We group the phenomena together according to whether or not they are theoretically consistent with RUM. Since then, behavioural economists and psychologists have found salient and robust anchoring effects in both experiments and real world choices.

In the context of the choice modelling literature, the main focus on anchoring effects has been how a previous choice setting can influence preferences in a subsequent choice setting.

A key example comes in value of time work, especially where based on stated choice data. Anchors may form specifically the first time a respondent faces a given type of choice, but subsequent choices may refine the anchor.

Kreps - Notes on the Theory of Choice - 1988

The influence of anchoring on the value of time has been considered in some depth by VandeKaa An anchor may also be constant formed the first time a respondent faces a particular choice or evolve over time e. If, in each choice situation, the choice is modelled with a RUM structure, then the actual choice is consistent with RUM, but the sequence is not consistent with a single definition of utility, as utility gets redefined over time, either just once for all choices following the initial choice, or after each choice.

Either way, such heterogeneity in valuations over time is not in principle inconsistent with RUM. Such effects are also visible in many stated choice surveys where one or more of the alternatives in a choice task have a zero cost to the respondent, be it in the case of toll road studies e.

The behaviour exhibited by this effect is not consistent with a linear cost sensitivity, which is a core assumption in many applications of choice models. However, it can easily be accommodated through a non-linear specification and does not lead to violations of utility maximisation.

Status quo bias Status quo bias refers to the phenomenon that individuals have strong propensity to choose the alternative that describes their current situation. It was first demonstrated by Samuelson and Zeckhauser , but is commonly observed in many stated choice surveys, especially when the status quo alternative is explicitly labelled as such.

The fact that individuals attach undue weight to their current situation does not lead to any issues from a utility maximisation perspective, and is routinely accommodated in models. A different issue of course applies if these models are used in forecasting, where the status quo is unknown.

Applications looking at this issue are common in environmental economics, see for example Meyerhoff and Liebe Mental accounting Mental accounting refers to the cognitive process by which individuals allocate their overall money budget into different mental accounts.

It is a common empirical finding that money in one mental account is not a perfect substitute for money in another account, thus violating the principle of fungibility Thaler