SCOPE OF THIS BOOK

This book is about decision theory under uncertainty, namely, asking how do, and how should, people make decisions in situations of uncertainty. You probably already know the standard answer in economics, namely, that people do, and should, maximize expected utility. I don't think that this is a bad answer if we know what “utility” and “probability” mean.

The difficulty is that we often don't. Both concepts are problematic. We will discuss the notion of utility at various points, but these notes basically revolved around the meaning of probability. We ask, what is meant by saying “the probability of event A is p”? There are obviously many other ways to organize the material presented here, and, in particular, one can start with the meaning of utility. The present organization is but one way to relate the various topics to each other.

Naturally, the main question around which this book is organized has implications regarding its scope and content. There are important and interesting recent developments in decision under uncertainty that are not discussed here. In particular, there is relatively little discussion of nonexpected utility theory under risk, namely, with given probabilities, and almost no reference to models of choices from menus and to various models of behavioral economics. On the first topic (and, in particular, on cumulative prospect theory), the reader is referred to Wakker (2008), which also covers much of the classical theories covered here.