Theory of decisions I

1. This course is given for the advanced master (such as QEM) as well as PhD students at Warsaw School of Economics
2. Focus: formal models of preferences in decisions made under risk, ambiguity and over time; both rational and behavioral approach.
3. Office hours (by e-mail appointment)
4. Grading: 75% written exam, 25% home assignment

Schedule

1. Feb 25, Expected Utility theorem of von Neumann, Morgenstern (1944)
   reading: [1] chapter 5, [2] chapter 9
2. Mar 6, Expected Utility theorem – proof,
   reading: [4] chapter 2
3. Mar 13, EU application: The model of self-justification of Brunnemeier and Parker (AER 2005)
   reading: class notes
4. Mar 20, Buying and selling price of a lottery, lottery vs random variable, EU theory vs EU model (theory plus interpretation), consequentialism, EU as a dead parrot, framing effects and reference dependence
   reading: class notes, [5] chapter 8-10, [7] problems 1.2 a-d, 2.1, Notes on perspectives, further reading: LINK
5. Mar 27, Expected Utility paradoxes, introduction to Prospect Theory, monotonicity problem of PT, Cumulative Prospect Theory – intuition and properties.
   reading: [5] chapter 8-10, Slide show, further reading: LINK sections 3-4
6. Apr 3, Prospect Theory and Cumulative Prospect Theory continued
   reading: [5] chapters 8-10, [4] chapter 6
7. Apr 10, The intuition behind rank dependence
   reading: [5] chapters 8-10, [4] chapter 6, LINK section 5-8
8. Apr 17, Range-dependent utility
   reading: Kontek, Lewandowski (2018), slides, kudos
9. Apr 24, vNM theorem for preferences defined over an arbitrary convex set
   reading: [6] pages 1-9, [3] chapter 8, [1] chapter 5
10. May 15, Anscombe, Aumann setup, state-dependent utility
    reading: [6] pages 1-9, [3] chapter 8, [1] chapter 7
11. May 22, Anscombe, Aumann (1963) theorem (setup by Fishburn, 1970)
    reading: [6] pages 1-9, [3] chapter 8, [1]  [1] chapter 7
12. May 29, Savage (1954) axioms and theorem
    reading: [2] chapters 11-13
13. June 5, Choquet Expected Utility and Maxmin Expected Utility
    reading: [2] chapters 16,18

Take-home exam – corrected The exam will consists of only the take-home assignment. Office hours are on Thursday, June 13, 9:50-10.30 AM in room A-105. Please read carefully the assignment and make sure that everything is clear and (hopefully) there are no mistakes, because I will answer your questions from now on till the end of the office hours on June 13, 10.30 AM. Good luck!!!

Exam solutions, Excel solutions, Exam results
If you want to consult and discuss your results, write me an e-mail and we will arrange for a personal meeting.

Readings and useful materials
[1] Kreps D., Notes on the theory of choice
[2] Gilboa I., Lecture notes on the Theory of Decision under Uncertainty
[3] Gilboa I., Lecture notes for introduction to decision theory
[4] Lewandowski M., Decision theory – Lecture notes in progress, very incomplete
[5] Noor J., Lecture Notes on Economic Theory and Psychology
[6] Schmeidler D., Technical notes for decision theory
[7] Lewandowski M., Selected problems for decision-making under risk