Working Paper: NBER ID: w14396
Authors: Charles F. Manski
Abstract: This paper concerns the prescriptive function of decision analysis. I suppose that an agent must choose an action yielding welfare that varies with the state of nature. The agent has a welfare function and beliefs, but he does not know the actual state of nature. It is often argued that such an agent should adhere to consistency axioms which imply that behavior can be represented as maximization of expected utility. However, our agent is not concerned the consistency of his behavior across hypothetical choice sets. He only wants to make a reasonable choice from the choice set that he actually faces. Hence, I reason that prescriptions for decision making should respect actuality. That is, they should promote welfare maximization in the choice problem the agent actually faces. I conclude that any decision rule respecting weak and stochastic dominance should be considered rational. Expected utility maximization respects dominance, but it has no special status from the actualist perspective. Moreover, the basic consistency axiom of transitivity has a clear normative foundation only when actions are ordered by dominance.
Keywords: Decision Analysis; Welfare Maximization; Expected Utility; Stochastic Dominance; Weak Dominance
JEL Codes: D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision rules that respect weak dominance (D81) | welfare outcomes of agents (D69) |
| action that is weakly dominated (D79) | not maximizing welfare (D69) |
| respecting stochastic dominance (D81) | probabilistic improvement in welfare outcomes (D69) |