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Rational Decisions (Binmore, 2009)

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Review
Ken Binmore is one of our deepest thinkers on the foundations of economics and game theory. Here he gives us his personal take on standard decision theory and his own extension of the theory to the case in which decision makers cannot assign unambiguous probabilities to future events. This book will be of considerable interest to economists and philosophers alike.
(Eric Maskin, Nobel Prize-winning economist )
 
Product Description
 
It is widely held that Bayesian decision theory is the final word on how a rational person should make decisions. However, Leonard Savage--the inventor of Bayesian decision theory--argued that it would be ridiculous to use his theory outside the kind of small world in which it is always possible to "look before you leap." If taken seriously, this view makes Bayesian decision theory inappropriate for the large worlds of scientific discovery and macroeconomic enterprise. When is it correct to use Bayesian decision theory--and when does it need to be modified? Using a minimum of mathematics, Rational Decisions clearly explains the foundations of Bayesian decision theory and shows why Savage restricted the theory's application to small worlds.
 
The book is a wide-ranging exploration of standard theories of choice and belief under risk and uncertainty. Ken Binmore discusses the various philosophical attitudes related to the nature of probability and offers resolutions to paradoxes believed to hinder further progress. In arguing that the Bayesian approach to knowledge is inadequate in a large world, Binmore proposes an extension to Bayesian decision theory--allowing the idea of a mixed strategy in game theory to be expanded to a larger set of what Binmore refers to as "muddled" strategies.
 
Written by one of the world's leading game theorists, Rational Decisions is the touchstone for anyone needing a concise, accessible, and expert view on Bayesian decision making.

p.3 The models we use to make sense of the world are merely human inventions.
 
p.14 utility functions are no more than a mathematical device introduced to help solve choice problems.
 
p.25 Game theory is perhaps the most important arena for the application of rational decision theory... A game arises when several players have to make decisions in a situation in which the outcome for each player is partly determined by the choices made by the other players.
 
p.76 In brief, we need to avoid fooling ourselves into thinking that we always know how to scale down the universe into a manageable package.
  The latter problem is captured in classical probability theory by saying that some events are measurable and others are not. The measurable events are those that we can tie down sufficiently to make it meaningful to attach a probability to them. To speak of the probability of a nonmeasurable set is to call upon the theory to deliver something for which it is unequipped.
 
p.79 In a sufficiently complex world, the implication is that some version of what I shall call the Horatio principle must apply: Some events in a large world are necessarily nonmeasurable.
 
p.146 Worse still, the kind of game-theoretic arguments that begin:
  If I think that he thinks that I think...
require that she contemplates models of the world that incorporate models of herself.
 
p.150 In the absence of an ultimate model of possible realities, we make do in practice with a bunch of gimcrack [JLJ gimcrack: A cheap and showy object of little or no use] models that everybody agrees are inadequate... The game we play with the notion of truth when manipulating such models isn't at all satisfactory, but it seems to me the only genuine game in town. I therefore seek guidance in how to model knowledge and truth from the way these notions are actually used when making... decisions in real life
 
p.151 I therefore suggest saying that Pandora reveals that she knows something if she acts as though it were true in all possible worlds generated by her model... knowledge is interpreted as commitment to a model.
 
p.151 In Bayesian decision theory, Pandora is similarly regarded as knowing the structure... of her decision problem because she never varies this structure when considering the various possible worlds that may arise as a result of her choice of an action

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