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Decision Making and the Brain (Rational Choice and Utility Theory…
Decision Making and the Brain
Why Economics?
Neural studies too simple
Simuli-response model
Economic theories more complex
Value-based decision making
Gambling
Rational Choice and Utility Theory
What is rational?
What determines choice?
What is utility?
Exchange-value
Balance
Usefulness
Which is more valuable: diamond or water?
Why diamonds are more costly than water?
Rarity
Why value depends on rarity?
Cost of production
Marginal Value
Slope - first derivative of a function
1 dollar for a poorman
1 dollar for a billionaire
less marginal value
Exhcange value becomes satisfaction
We don't consider feelings here
Economic value is considered
Formalized Utility Function
Expected Value = sum of
(expected win * expected probability)
Predicts that it is irrational to choose 7000
7000 definitely VS
10000 or 0
Bernoulli: utility function
We don't try to maximize expected value
We try to maximize utility function
u(7000) vs u(1000
0.5) + u(0
0.5)
Uknown shape u
Criticism: Paretto
Doesn't give cardinal scale, only ordinal
Samuelson Rule
Weak Axiom of Revealed Preference
By choosing a over b when both bundles are affordable, the consumer reveals that their preferences are such that they will never choose b over a, while prices remain constant.
