Risk and tradeoffs

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Abstract

The orthodox theory of instrumental rationality, expected utility (EU) theory, severely restricts the way in which risk-considerations can figure into a rational individual's preferences. It is argued here that this is because EU theory neglects an important component of instrumental rationality. This paper presents a more general theory of decision‐making, risk-weighted expected utility (REU) theory, of which expected utility maximization is a special case. According to REU theory, the weight that each outcome gets in decision‐making is not the subjective probability of that outcome; rather, the weight each outcome gets depends on both its subjective probability and its position in the gamble. Furthermore, the individual's utility function, her subjective probability function, and a function that measures her attitude towards risk can be separately derived from her preferences via a Representation Theorem. This theorem illuminates the role that each of these entities plays in preferences, and shows how REU theory explicates the components of instrumental rationality.

Original languageEnglish (US)
Pages (from-to)1091-1117
Number of pages27
JournalErkenntnis
Volume79
Issue number6
DOIs
StatePublished - Sep 24 2014
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Philosophy
  • Logic

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