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# Making Better Decisions: Decision Theory in Practice

ISBN: 978-1-444-33652-8 October 2010 Wiley-Blackwell 232 Pages

## Description

Making Better Decisions introduces readers to some of the principal aspects of decision theory, and examines how these might lead us to make better decisions.
• Introduces readers to key aspects of decision theory and examines how they might help us make better decisions
• Presentation of material encourages readers to imagine a situation and make a decision or a judgment
• Offers a broad coverage of the subject including major insights from several sub-disciplines: microeconomic theory, decision theory, game theory, social choice, statistics, psychology, and philosophy
• Explains these insights informally in a language that has minimal mathematical notation or jargon, even when describing and interpreting mathematical theorems
• Critically assesses the theory presented within the text, as well as some of its critiques
• Includes a web resource for teachers and students

## Related Resources

##### Instructor

View Instructor Companion Site

Preface viii

Acknowledgments x

1 Background 1

2 Judgment and Choice Biases 6

Introduction 6

Problems – Group A 9

Problems – Group B 12

Framing Effects 15

Brainstorming and Formal Models 20

Endowment Effect 22

Sunk Costs 27

Decision Trees 30

Representativeness Heuristic 34

Availability Heuristic 39

Anchoring 44

Mental Accounting 46

Dynamic Inconsistency 51

Exercises 53

3 Consuming Statistical Data 57

Introduction 57

Problems 58

Conditional Probabilities 63

Gambler’s Fallacy 72

Biased Samples 77

Regression to the Mean 80

Correlation and Causation 81

Statistical Significance 84

Bayesian and Classical Statistics 85

Exercises 93

4 Decisions under Risk 98

Introduction 98

Problems 99

The Independence Axiom 102

Von Neumann and Morgenstern's Result 110

Measurement of Utility 113

Risk Aversion 116

Prospect Theory 123

Exercises 130

5 Decisions under Uncertainty 133

Introduction 133

Problems 134

Subjective Probability 141

Learning From the Fact We Know 151

Causality 163

The Sure Thing Principle 166

Alternative Models 171

Objective Probabilities 172

Exercises 174

6 Well-Being and Happiness 178

Introduction 178

Problems – Group A 179

Problems – Group B 180

Measurement Issues 184

What's Happiness? 186

Exercises 188

Appendix A: Optimal Choice 191

Appendix B: Probability and Statistics 195

Solutions 204

Index 210