Making Better Decisions

Itzhak Gilboa is a chaired Professor in the Department of Economics and Decision Sciences at HEC, Paris and in the Eitan Berglas School of Economics at Tel Aviv University, and Fellow of the Cowles Foundation at Yale University. He previously held the position of chaired Professor at the Kellogg School of Management at Northwestern University. Gilboa’s research focuses on decision under uncertainty. He has worked with David Schmeidler on axiomatic foundation of non-Bayesian decision theory and contributed to research in complexity in game theory, evolutionary game theory, and social choice. He is co-author of A Theory of Case-Based Decisions (with David Schmeidler, 2001), and author of Theory of Decision under Uncertainty (2009) and of Rational Choice (2010).

• Preface viii Acknowledgments x1 Background 1Suggested Reading 52 Judgment and Choice Biases 6Introduction 6Problems – Group A 9Problems – Group B 12Framing Effects 15Brainstorming and Formal Models 20Endowment Effect 22Sunk Costs 27Decision Trees 30Representativeness Heuristic 34Availability Heuristic 39Anchoring 44Mental Accounting 46Dynamic Inconsistency 51Exercises 533 Consuming Statistical Data 57Introduction 57Problems 58Conditional Probabilities 63Gambler’s Fallacy 72Biased Samples 77Regression to the Mean 80Correlation and Causation 81Statistical Significance 84Bayesian and Classical Statistics 85Exercises 934 Decisions under Risk 98Introduction 98Problems 99The Independence Axiom 102Von Neumann and Morgenstern's Result 110Measurement of Utility 113Risk Aversion 116Prospect Theory 123Exercises 1305 Decisions under Uncertainty 133Introduction 133Problems 134Subjective Probability 141Learning From the Fact We Know 151Causality 163The Sure Thing Principle 166Alternative Models 171Objective Probabilities 172Exercises 1746 Well-Being and Happiness 178Introduction 178Problems – Group A 179Problems – Group B 180Measurement Issues 184What's Happiness? 186Exercises 188Appendix A: Optimal Choice 191Appendix B: Probability and Statistics 195Solutions 204Index 210