# Making Better Decisions: Decision Theory in Practice

## Itzhak Gilboa

Language: English

Pages: 232

ISBN: 1444336525

Format: PDF / Kindle (mobi) / ePub

*Making Better Decisions* introduces readers to some of the principal aspects of decision theory, and examines how these might lead us to make better decisions.

- Introduces readers to key aspects of decision theory and examines how they might help us make better decisions
- Presentation of material encourages readers to imagine a situation and make a decision or a judgment
- Offers a broad coverage of the subject including major insights from several sub-disciplines: microeconomic theory, decision theory, game theory, social choice, statistics, psychology, and philosophy
- Explains these insights informally in a language that has minimal mathematical notation or jargon, even when describing and interpreting mathematical theorems
- Critically assesses the theory presented within the text, as well as some of its critiques
- Includes a web resource for teachers and students

How To Sell When Nobody's Buying: And How to Sell Even More When They Are

Getting Naked: A Business Fable About Shedding the Three Fears That Sabotage Client Loyalty

Due Diligence and the Business Transaction: Getting a Deal Done

The Elements of Persuasion: Use Storytelling to Pitch Better, Sell Faster & Win More Business

Prototype to Product: A Practical Guide for Getting to Market

Creative People Must Be Stopped: 6 Ways We Kill Innovation (Without Even Trying)

about the quality of the mug: mugs are mugs. The experiment does 25 9781444336511_4_002.indd 25 7/10/2010 6:43:06 PM Judgment and Choice Biases not allow us to switch among mugs, so that the second issue is not terribly relevant either. And finally, there isn’t that much to get used to in using a mug to drink coffee. As a result, you may find that, while it is generally a good idea to stick to your choices to some extent, it isn’t rational to demand for the mug much more than you are willing

concavity of the function u relates to risk aversion, consider a simple case as in Problem 4.1. Suppose that your wealth level is W and that I offer you a bet of $100 on a fair coin. Thus, with probability of 50% you’ll gain $100, and will have W + 100, and with probability of 50% you’ll lose $100, and will have W – 100. You may think of your gain as a random variable, X, with the following distribution: ⎧ +100 0.50 X=⎨ ⎩ −100 0.50 117 9781444336511_4_004.indd 117 7/12/2010 2:55:05 PM

7/10/2010 8:52:45 PM Decisions under Uncertainty MARTINE: Yes, but it depends on the competition. And I don’t know whether they will or won’t cut prices. VERONIQUE: I’m not so sure you should care. If the competition cuts prices, you have to cut prices as well. If they don’t, you’re better off cutting prices and being the cheapest. MARTINE: How come? By this reasoning, we should sell at zero prices. VERONIQUE: Well, maybe not zero prices, but close to zero profit. It happens. It’s related to

therefore pays no taxes will not benefit from a tax deduction at all. These two examples suggest that framing effects are quite common. Indeed, we’d expect marketing people as well as politicians to be masterful at “framing” options in attractive ways. People whose job it is to try to sell something to us typically have a good feel as to which representations work better than others. Brainstorming and Formal Models What can be done to avoid framing effects? More generally, how can we avoid

creatures are lists of probability numbers that need to sum up to 1. Hence, if there is 30% probability of death, you’ll have to write down also the complement event, namely, survival, and find that it has a probability of 70%. And if you were to start with Problem 2.12, by similar reasoning you would end up with the same distribution. In other words, if you put upon yourself the discipline of using formal models, you won’t be able to attach importance to the representation, and you will be