Edwards - The theory of decision-making

The theory of riskless choice

Armchair theory

assumption: decision-maker is a rational economic man

Utility theory

Can utilities be added?

NO

competing goods

YES

completing goods

Non-independent utilities

indifference curves

application in welfare economics

Pareto's principle

Compensation principle

non-realistic

The theory of risky choice

maximize expected utility instead of expected value

double-inflected utility curve for money

Probability weighting function

subjective vs real probability

typical vs ideal estimates of probabilities