A decision maker has a preference relation over the space of lotteries L(Z) having a set...
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A decision maker has a preference relation over the space of lotteries L(Z) having a set of prizes Z. On Sunday he learns that on Monday he will be told whether he has to choose between L, and L2 (probability 1 > a > 0) or between L; and L4 (probability 1-a). He will make his choice at that time. Let us compare between two possible approaches the decision maker may take. Approach 1: He delays his decision to Monday ("why bother with the decision now when I can make up my mind tomorrow...."). Approach 2: He makes a contingent decision on Sunday regarding what he will do on Monday, that is, he instructs himself what to do if he faces the choice between L, and L2 and what to do if he faces the choice between L3 and L4 ("On Monday morning I will be so busy...."). a. Formulate approach 2 as a choice between lotteries. b. Show that if the preferences of the decision maker satisfy the indepen- dence axiom, his choice under approach 2 will always be the same as under approach 1. A decision maker has a preference relation over the space of lotteries L(Z) having a set of prizes Z. On Sunday he learns that on Monday he will be told whether he has to choose between L, and L2 (probability 1 > a > 0) or between L; and L4 (probability 1-a). He will make his choice at that time. Let us compare between two possible approaches the decision maker may take. Approach 1: He delays his decision to Monday ("why bother with the decision now when I can make up my mind tomorrow...."). Approach 2: He makes a contingent decision on Sunday regarding what he will do on Monday, that is, he instructs himself what to do if he faces the choice between L, and L2 and what to do if he faces the choice between L3 and L4 ("On Monday morning I will be so busy...."). a. Formulate approach 2 as a choice between lotteries. b. Show that if the preferences of the decision maker satisfy the indepen- dence axiom, his choice under approach 2 will always be the same as under approach 1.
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Formulate Approach 2 as a choice between lotteries Refer to the lottery set faced on Monday as a dis... View the full answer
Related Book For
Probability and Statistics
ISBN: 978-0321500465
4th edition
Authors: Morris H. DeGroot, Mark J. Schervish
Posted Date:
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