Decision Support
Focus theory of choice and its application to resolving the St. Petersburg, Allais, and Ellsberg paradoxes and other anomalies

https://doi.org/10.1016/j.ejor.2019.01.019Get rights and content
Under a Creative Commons license
open access

Highlights

  • A new decision theory which models and axiomatizes the procedural rationality.

  • It accounts for St. Petersburg, Allais, and Ellsberg paradoxes, and other anomalies.

  • Decision under risk or ambiguity or ignorance can be made within a unified framework.

Abstract

We present a decision theory which models and axiomatizes a decision-making procedure. This procedure involves two steps: in the first step, for each action, some specific event which can bring about a relatively high payoff with a relatively high probability or a relatively low payoff with a relatively high probability is selected as the positive or negative focus, respectively; in the second step, based on the foci of all actions, a decision maker chooses a most-preferred action. Our model handles decision making with risk or under ambiguity or under ignorance within a unified framework. Our model resolves several anomalies, including the St. Petersburg, Allais, and Ellsberg paradoxes, and violations of stochastic dominance.

Keywords

Decision support systems
Behavioral model
The St. Petersburg paradox
The Allais paradox
The Ellsberg paradox

Cited by (0)