Date of Award

6-2009

Document Type

Union College Only

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Stephen Schmidt

Language

English

Keywords

expected, subjective, utility, axioms, model

Abstract

The axioms of subjective expected utility owed to Savage (1954) are often interpreted as rules which any rational individual will adhere to, and these axioms are of foundational importance to the modern field of decision theory. In this study, we investigate how the heuristic search model of bounded rationality owed to MacLeod (2002) can be used to resolve a number of the challenges which have been raised against subjective expected utility theory. We begin by presenting the history of economic thought culminating in subjective expected utility and producing an original construction of its theoretical framework. We then proceed to motivate the study of more general models of rationality through a thorough evaluation of normative arguments, theoretical examples, and consistent empirical findings suggesting that rational agents could, in fact, violate Savage’s axioms. We focus in particular on completeness, transitivity, and independence. We then formally present the heuristic search model, which asserts that individuals cannot consider all alternatives and so search for a sufficient choice, and prove that this model can, indeed, reconcile a number of the challenges to subjective expected utility – including violations of completeness and transitivity, the Allais Paradox, and the Ellsberg Paradox.

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