Adaptive Utility

Abstract

In chapter 2, we discussed the concept of decision making and noted that the two central components of a decision problem under uncertainty are the decision maker’s subjective probabilities, which characterize knowledge and beliefs, and subjective utilities, which characterize preferences and tastes. In the usual development of decision theory and descriptions of decision making, provision is made for the decision maker to change probabilities in the light of new information, but no provision is made for changing utilities in the light of such information. As a result, examples such as the “Aliais paradox” have been constructed which show that a decision maker may make a sequence of choices which are inconsistent with any fixed utility function (Allais 1953; DeGroot 1970; Allais and Hagen 1979). Attempts to allow for such inconsistencies in the choices of a decision maker have led to the development of stochastic models of choice behavior and the notion of a stochastic utility function (Luce and Suppes 1965; Manski and McFadden 1981).