Belief and Preference in Decision Under Uncertainty

Abstract

Most decisions in life are gambles. Should I speed up or slow down as I approach the yellow traffic light ahead? Should I invest in the stock market or in treasury bills? Should I undergo surgery or radiation therapy to treat my tumor? From mundane choices rendered with scarcely a moment's reflection to urgent decisions founded on careful deliberation, we seldom know in advance and with certainty what the consequences of our choices will be. Thus, most decisions require not only an assessment of the attractiveness of potential consequences, but also some appraisal of their likelihood of occurrence. Virtually all decision theorists agree that values and beliefs jointly influence willingness to act under uncertainty. However, there is considerable disagreement about how to measure values and beliefs, and howto model their influence on decisions. Our purpose in this chapter is to bring into sharper focus the role of values and beliefs in decision under uncertainty and contrast some recent developments in the descriptive modeling of choice under uncertainty with the classical normative model.

Keywords: risk, uncertainty, expected utility, prospect theory, ambiguity, judged probability, decision theory

JEL Classification: A10, C44, D81, M10