Rational Choice :: Economics

Rational Choice --------------- In the past century, philosophers and social scientists have given theories of individual and interactive decision making a rigorous foundation. Indeed, contemporary decision and game theory have revolutionized our understanding of rational choice in ways that parallel the concurrent revolution in philosophical logic. Carnegie Mellon's philosophy department is recognized as one of the foremost departments in the world in decision and game theory. Primary research at Carnegie Mellon in decision and game theory focuses on the foundations of Bayesian decision theory, interactive knowledge concepts and their applications in game theory and equilibrium selection in games. Decision theory is motivated to a large extent by the consequentialist, and especially the utilitarian, traditions in moral philosophy. To bring about the best consequences, one must know what they are. From the beginning, both critics and defenders of moral consequentialism raised skeptical doubts about the possibility of ever deriving a satisfactory procedure for rank ordering alternatives so as to identify the best choice. In the special case of utilitarianism, the great 19th century utilitarians John Stuart Mill and Henry Sidgwick themselves thought that an exact calculus of utility that would enable societyÈs members to know precisely how to produce the greatest overall welfare might not be possible. Any proposal for a utilitarian calculus raises two fundamental questions: (1) How are quantities of utility to be ascribed to alternatives in a nonarbitrary way?, and (2) How are likelihoods to be ascribed to alternatives in a nonarbitrary way? A decision theory based upon utility is intimately related to theories of probability, which are needed for the calculation of expected consequences. In 1926, Frank Ramsey presented a monumental essay Truth and Probability, which laid the cornerstones of contemporary decision theory. Ramsey proved a representation theorem that enables one to derive both quantitative utilities and probabilities over alternatives that uniquely cohere with one's qualitative preferences over these alternatives. The work of Ramsey and his successors, most notably Leonard Savage, has resulted in modern Bayesian decision theory, which provides a precise account of how to choose so as to maximize expected utility. This work has also sparked a great flowering of alternative decision theories, some of which generalize Ramsey's and Savage's treatments and some of which constitute alternatives to standard Bayesian decision theory. Game theory considers cases in which decision problems interact. The mathematician John von Neumann and the economist Oskar Morgenstern established game theory as an important branch of social science in 1944 with the publication of their treatise Theory of Games and Economic Behavior. Von Neumann and Morgenstern presented a precise mathematical account of situations in which agents make interdependent decisions. To be sure, von Neumann and Morgenstern had intellectual precursors. In the 1910s and 1920s, the mathematicians Ernst Zermelo