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Rational Choice

Rational Choice

Itzhak Gilboa
Copyright Date: 2010
Published by: MIT Press
Pages: 176
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  • Book Info
    Rational Choice
    Book Description:

    This book offers a rigorous, concise, and nontechnical introduction to some of the fundamental insights of rational choice theory. It draws on formal theories of microeconomics, decision making, games, and social choice, and on ideas developed in philosophy, psychology, and sociology. Itzhak Gilboa argues that economic theory has provided a set of powerful models and broad insights that have changed the way we think about everyday life. He focuses on basic insights of the rational choice paradigm--the general conceptualization rather than a particular theory--that survive recent (and well-justified) critiques of economic theory's various failures. Gilboa explains the main concepts in language accessible to the nonspecialist, offering a nonmathematical guide to some of the main ideas developed in economic theory in the second half of the twentieth century. Chapters cover feasibility and desirability, utility maximization, constrained optimization, expected utility, probability and statistics, aggregation of preferences, games and equilibria, free markets, and rationality and emotions. Online appendixes offer additional material, including a survey of relevant mathematical concepts.

    eISBN: 978-0-262-26599-7
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-xii)
  3. Preface
    (pp. xiii-xvi)
  4. Suggested Reading
    (pp. xvii-xviii)
  5. I Optimization

    • 1 Feasibility and Desirability
      (pp. 3-10)

      Aesopʹs Fox One afternoon a fox was walking through the forest and spotted a bunch of grapes hanging from a high branch.

      ʺJust the thing to quench my thirst,ʺ said he.

      Taking a few steps back, the fox jumped and just missed the hanging grapes. Again the fox took a few paces back, jumped, and tried to reach them but still failed. Finally, giving up, the fox turned up his nose and said, ʺTheyʹre probably sour anyway,ʺ and walked away.

      Groucho Marxʹs Club ʺI donʹt care to belong to a club that accepts people like me as members.ʺ

      Wishful Thinking...

    • 2 Utility Maximization
      (pp. 11-24)

      [Ann is sitting by a table. Barbara, her sister, enters.]

      Barbara: Hey, whatʹs up?

      Ann: Nothing.

      Barbara: But youʹre depressed.

      Ann: No, Iʹm not.

      Barbara: Cʹmon, I know you better than that. You are obviously, positively, definitely depressed.

      Ann: Iʹm not depressed, itʹs just that ….

      Barbara: … yes?

      Ann: Well, you wonʹt tell anyone, will you?

      Barbara: Of course not, you can trust me; this is what you have big sisters for.

      Ann: The same way I could trust you then with the chocolate?

      Barbara: Oh, donʹt be silly, we were kids then. [Both smile.]

      Ann: Well, the thing...

    • 3 Constrained Optimization
      (pp. 25-32)

      The discussion in chapter 1 concluded that rational choice should distinguish between the desirable and the feasible. Chapter 2 established thatdesirablemeans ʺhaving a higher utilityʺ for an appropriately chosen utility function. Coupling these two ideas, we are led to a model of rational choice asconstrained optimization, namely, choosing an alternative that maximizes utility (or an objective function or a payoff function) given constraints.

      We may distinguish among three stages in the formulation of a problem:

      1. Identify thedecision variables—which variables are under the decision makerʹs control?

      2. Identify theconstraints—which combinations of values of the variables...

  6. II Risk and Uncertainty

    • 4 Expected Utility
      (pp. 35-48)

      Insurance I have a car, which is worth $10,000. I estimate the probability that it will be stolen, over the course of one year, at 1 percent. I can buy insurance, which, for an annual premium of $200, will cover the potential loss. Should I buy this insurance?

      The loss is not known, of course. This is a problem under conditions of risk, and the loss is called arandom variable. It may assume different values (hence it is a variable), but we do not determine its value (hence it is random). Specifically, the random variable ʺlossʺ in this example...

    • 5 Probability and Statistics
      (pp. 49-70)

      Natasha: I think itʹs not a good idea to buy an apartment right now.

      Olga: Oh, yes, why?

      Natasha: They say that the housing market is going to go down.

      Olga: Really? For sure?

      Natasha: Well, not for sure. If they knew this for sure, the market would go down immediately.

      Olga: So?

      Natasha: Not for sure, but with very high probability.

      Olga: How high?

      Natasha: Iʹd say, 80 percent.

      Olga: 80 percent?

      Natasha: Yes, thatʹs a reasonable estimate.

      Olga: What does it mean?

      Natasha: You donʹt know what 80 percent means?

      Olga: Donʹt be silly. I know what 80...

  7. III Group Choices

    • [III Introduction]
      (pp. 71-72)

      We have so far assumed a single decision maker. This decision maker can be a person or an organization, such as a state or a firm. It can also be an animal or a species or even an inanimate object such as a robot. All these decision makers can be ascribed a utility function and can be viewed as making decisions under certainty or uncertainty, according to objective or subjective beliefs, which reflect correct or erroneous statistical inference. In short, the discussion thus far can be quite general in terms of its applications. But it says nothing about what choices...

    • 6 Aggregation of Preferences
      (pp. 73-90)

      It appears that the simplest way of aggregating preferences is to add up the utility functions of all individuals involved and to maximize this sum. If we take the utility functionuias a measure of the well-being of individuali, the sum of utilities across individuals will give us a measure of the overall well-being in society. Maximizing this sum appears to be the right thing to do.

      This maximization is often referred to as utilitarianism. This term was coined in the late eighteenth century by Jeremy Bentham, who suggested that one should bring about ʺthe greatest happiness of...

    • 7 Games and Equilibria
      (pp. 91-118)

      The original story of prisonerʹs dilemma is well known but worth repeating. Two guys commit a crime. They are arrested by the police, who are quite sure they are guilty but cannot prove it without at least one of them confessing. The police offer them the following deal. Each one of them can confess and get some credit for it. If only one confesses, he becomes a state witness, and not only is he not punished, he gets a reward (sent on a vacation to the Bahamas, away from his ex-collaboratorʹs friends). If both confess, they will be punished but...

    • 8 Free Markets
      (pp. 119-136)

      Olivier: I hate whatʹs happening to this country. It doesnʹt feel like France anymore.

      Paul: What do you mean?

      Olivier: Everything is produced elsewhere. Nothing is real. Anything you can think of is produced in China or Korea.

      Paul: And whatʹs wrong with that?

      Olivier: Itʹs just not my country anymore. Apart from cheeses, thank God, which they still havenʹt figured out how to import.

      Paul: And … ?

      Olivier: You know, wherever you go it feels like the countryʹs being taken over by foreigners.

      Paul: I see. You mean that there are too many immigrants.

      Olivier: There are a...

  8. IV Rationality and Emotions

    • 9 Evolutionary View of Emotions
      (pp. 139-142)

      It is common to view rationality as the opposite of emotionality. Presumably, emotions are ill-explained forces that sometimes take over, whereas reason is the cool, calculating machine that helps us control our emotions.

      There is surely some truth to this depiction. Consider a man who comes home, finds his wife in bed with another man, pulls out a gun, shoots them both to death, and spends the rest of his life in jail. The man might well regret his choice and say that he ʺlost his reason,ʺ that ʺemotion took over,ʺ and the like. Indeed, this might qualify as a...

    • 10 Utility and Well-Being
      (pp. 143-148)

      It is very natural to identify the notion of utility with such concepts as well-being or even happiness. One may even argue that this is what utility is supposed to measure. But it does not follow from anything said previously that this is what it does in fact measure.

      Utility was defined by the way we use it. In choice under certainty, maximization of utility described choices made by individuals who are consistent enough in their behavior to admit such a representation. The same was true of maximization of expected utility in the context of choices under risk or under...

  9. Epilogue
    (pp. 149-150)

    The rational choice paradigm provides a way of thinking about the world, but it does not provide answers to a multitude of concrete questions. Throughout this book we have encountered questions that arise in the social sciences and that lead us to traditional questions in philosophy. Problems that range from the definition of probability to the meaning of happiness, from the notion of rationality to the essence of justice, belong to the realm of philosophy, but they pop up in practical guises in questions of the social sciences.

    Most of these philosophical questions do not have objective or scientific answers....

  10. Notes
    (pp. 151-154)
  11. Index
    (pp. 155-158)