Rational Choice Theory

Jurgen¨ Landes Winter Term 2016 - 2017

Summary

In this course students will learn about making normatively right choices. Choices can be analysed by using formal decision making frameworks. The paradigmatic decision making framework in the philosophy of science (and elsewhere) is the expected maximum utility paradigm due to Savage. We shall discuss strengths and weaknesses of Savage’s framework. Further topics of the course are group- decisions and social choice theory.

Assessment

Assessment: 50% presentation, 50% essay. Topic of presentation and essay are chosen by the student. It makes sense to present and write about the same topic.

Presentations are mainly assessed with respect to the communication of ideas/concepts/arguments.

Essays should be around 10 pages (20,000 characters), clearly structured, con- tain a well-argued for philosophical claim, original and refer to relevant literature.

Deadline for essay submission: Friday, 31. Mar. 2017 An essay is submitted, AFTER I confirm the receipt via email. After I confirm the submission, it will still take me some time before I read and grade your work.

1 Week by Week

Week 1: Introduction & Decision Making Suggested Readings: SEP on Decision Theory Savage(1972) http://www.econ2.jhu.edu/people/Karni/savageseu.pdf

Week 2: Conference on Rational Choice We are attending the Topoi Conference: New Trends in Rational Choice Theory. There is no need for students to register, just show up; it’s free.

Week 3: Kolmogorov’s Axioms & Discussion of Conference Suggested Readings: Basic Probability Theory, for example Binomial Coefficients, Combinations For a proper understanding, I suggest the SEP on Probabilities and/or Sections 5–11 of Williamson(2009).

Week 4: Mechanism Design, Vickrey Auction, eBay Suggested Readings: Roth(2002); Klemperer(2002b,a); Vickrey(1961); Jehiel et al.(1996); Krishna (2002) Selling pens: Link 1, Link 2, Link 3 and Link 4

Week 5: Centipede Game Suggested Readings: Aumann(1995, 1998); Baltag et al.(2009); Broome and Rabinowicz(1999); Ra- binowicz(1998)

Week 6: Prospect Theory Suggested Readings: Kahneman and Tversky(1979); Tversky and Kahneman(1981, 1992)

Week 7: Pirate Game Suggested Readings: Wiki on the Pirate Game, Stewart(1999) (see https://omohundro.files.wordpress.com/2009/03/stewart99 a puzzle for pirates.pdf Further Readings: browse for things which interest You (such as possibly the fol-

2 lowing) Link

Week 8: Arrow’s and Gibbard-Satterthwaite Theorem Suggested Readings: SEP on Arrow, Wiki on Arrow Arrow(1950); Satterthwaite(1975)

Week 9: Instant Gratification – Postponed Guest lecture by Professor Zimbardo Zimbardo @ Google

Week 10 (23.12.2016): Credit Session For students interested in credits. Please, bring some ideas on what you would like to write and present. This session is purely informal to help students settle on a topic.

Week 11: The Market for Lemmons 2-Minute presentations (unmarked) for early feedback. Suggested Readings: Akerlof(1970); Resnick et al.(2006) Start preparing presentations

Week 12: Preparing for Workshop on Drug Safety CANCELLED – Illness Readings: Book of Abstracts Worrall(2007), Page 2 of this Project Proposal Epistemology of Causal Inference in Pharmacology

Week 13: Workshop on Drug Safety – Program & Book of Abstracts Venue: Main University Building Geschwister-Scholl-Platz 1 Rooms A017, A016 and PHP-V005

Week 14: Student Presentations Pirate Game, ... Marked.

Week 15: Student Presentations Marked.

3 References

Akerlof, G. A. (1970). The Market for ’Lemons’: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics, 84(3):488–500.

Arrow, K. J. (1950). A Difficulty in the Concept of Social Welfare. Journal of Political Economy, 58(4):328–346.

Aumann, R. J. (1995). Backward Induction and Common Knowledge of Ratio- nality. Games and Economic Behavior, 8(1):6–19.

Aumann, R. J. (1998). On the Centipede Game. Games and Economic Behavior, 23(1):97–105.

Baltag, A., Smets, S., and Zvesper, J. (2009). Keep ’hoping’ for rationality: a solution to the backward induction paradox. Synthese, 169:301–333.

Broome, J. and Rabinowicz, W. (1999). Backwards induction in the centipede game. Analysis, 59(4):237–242.

Jehiel, P., Moldovanu, B., and Stacchetti, E. (1996). How (not) to sell nuclear weapons. American Economic Review, 86(4):814–829.

Kahneman, D. and Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2):263–292.

Klemperer, P. (2002a). How (not) to run auctions: The European 3G telecom auctions. European Economic Review, 46(4-5):829–845.

Klemperer, P. (2002b). What really matters in auction design. Journal of Eco- nomic Perspectives, 16(1):169–189.

Krishna, V. (2002). Auction Theory. Academic Press.

Rabinowicz, W. (1998). Grappling With the Centipede: Defence of Backward Induction for BI-Terminating Games. Economics and Philosophy, 14(01):95– 126.

Resnick, P., Zeckhauser, R., Swanson, J., and Lockwood, K. (2006). The value of reputation on eBay: A controlled experiment. Experimental Economics, 9:79– 101.

4 Roth, A. E. (2002). The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics. Econometrica, 70(4):1341– 1378.

Satterthwaite, M. A. (1975). Strategy-proofness and Arrow’s conditions: Exis- tence and correspondence theorems for voting procedures and social welfare functions. Journal of Economic Theory, 10(2):187–217.

Savage, L. J. (1972). The Foundations of Statistics. Dover Publications, 2nd edition.

Stewart, I. (1999). A Puzzle for Pirates. Scientific American, 280:98–99.

Tversky, A. and Kahneman, D. (1981). The framing of decisions and the psychol- ogy of choice. Science, 211(4481):453–458.

Tversky, A. and Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5:297–323.

Vickrey, W. (1961). Counterspeculation, Auctions, and Competitive Sealed Ten- ders. Journal of Finance, 16(1):8–37.

Williamson, J. (2009). Philosophies of Probability. In Irwine, A., editor, Hand- book of the Philosophy of Science, Volume 4, pages 493–533. North-Holland.

Worrall, J. (2007). Evidence in Medicine and Evidence-Based Medicine. Philos- ophy Compass, 2(6):981–1022.

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