Fri Dec 2, 2011
60 Evans Hall, 4:10–6 PM
Lara Buchak (University of California, Berkeley)
Risk and Trade-offs
The prevailing view is that subjective expected utility theory is the correct theory of instrumental rationality. Subjective expected utility theory (hereafter, EU theory) is thought to characterize the preferences of all rational decision makers. And yet, there are some preferences that violate EU theory that seem both intuitively appealing and prima facie consistent. An important group of these preferences stem from how ordinary decision makers take risk into account: ordinary decision makers seem to care about “global” properties of gambles, but EU theory rules out their doing so.
EU theory allows agents to subjectively determine how much they value outcomes (their utility function) and how likely they think various states are to obtain (their probability function). However, there is arguably a third subjective component of instrumental rationality, namely one’s norm for translating these two values into preferences among risky acts. On EU theory, every rational agent must use the same norm, a norm that is insensitive to global properties. I propose a theory on which decision makers subjectively determine how they want to take risk into account, and thus subjectively determine all three components of instrumental rationality. By providing a “representation theorem”, I show that the third component corresponds at the level of preferences to how an individual values trade-offs in different structural parts of the gamble, e.g., to whether he cares more about what happens in the worst-case scenario or the best-case scenario. And I therefore show how non-EU maximizers can be seen as instrumentally rational: as taking the means to their ends.