Focus Theory of Choice: Modeling Procedural Rationality and Resolving the St. Petersburg, Allais, and Ellsberg Paradoxes, Preference Reversals, the Event-Splitting Effect, and the Violations of Tail-Separability, Stochastic Dominance and Transitivity

56 Pages Posted: 27 Nov 2017

See all articles by Peijun Guo

Peijun Guo

Yokohama National University - Faculty of Business Administration

Date Written: November 18, 2017

Abstract

We present a decision theory which models and axiomatizes a decision-making procedure. This procedure involves two steps: in the first step, for each action, some specific event which can bring about a relatively high outcome with a relatively high probability or a relatively low outcome with a relatively high probability is selected as the positive or negative focus, respectively; in the second step, based on the foci of all actions, a decision maker chooses a most-preferred action. Our model can account for many anomalies, including preference reversals, violations of stochastic dominance, violations of transitivity, the St. Petersburg, Allais, and Ellsberg paradoxes, the event-splitting effect, and the violation of tail-separability, and handles decision making with risk or under ambiguity or under ignorance within a unified framework.

Keywords: procedural rationality, focus, the St. Petersburg paradox, the Allais paradox, the Ellsberg paradox, preference reversals, violation of stochastic dominance, violation of transitivity, event-splitting effect, violation of tail-separability

JEL Classification: D03, D81

Suggested Citation

Guo, Peijun, Focus Theory of Choice: Modeling Procedural Rationality and Resolving the St. Petersburg, Allais, and Ellsberg Paradoxes, Preference Reversals, the Event-Splitting Effect, and the Violations of Tail-Separability, Stochastic Dominance and Transitivity (November 18, 2017). Available at SSRN: https://ssrn.com/abstract=3073726 or http://dx.doi.org/10.2139/ssrn.3073726

Peijun Guo (Contact Author)

Yokohama National University - Faculty of Business Administration ( email )

79-4 Tokiwa-dai Hodogaya-ku
Yokohama, Kanagawa, 2408501
Japan

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