Essays on Decision Theory

Decision problems could involve comparisons of alternatives according to different aspects. An alternative may be more desirable than another alternative in some of the aspects, yet less desirable in others. The multi-dimensional comparisons between alternatives requires a high degree of rationality -- the ability to make systematic trade-offs across aspects.

Limited ability to make such trade-offs could lead to the default bias, the tendency of choosing the default regardless of the presence of a better one. In dynamic decision problems, default bias causes a novel trade-off between the current consumption and the flexibility to switch in the future. An asset replacement problem and a contract design problem involving decision makers with default bias are studied.

A decision maker may resort to market information to better understand the right trade-off to make in multi-aspects comparisons between alternatives. When the market composition of products that features different aspects carry relevant information regarding the trade-offs, the decision maker’s choices between two products could be affected by the presence of other alternatives. Learning from markets explains violations of the properties of classic random utility maximization models.

Normatively appealing decision rules are proposed for each of the scenarios of multi-dimensional comparisons. A choice rule imposes behavioral conditions that the choice data must satisfy if the data is generated by such a rule. The essays in the dissertation identify the behavioral conditions that characterize the proposed choice rules: When the decision maker’s behaviors satisfy those conditions, the behaviors can be interpreted as if they are made according to the choice rule.

The dissertation distinguishes itself from some of the existing literature in that the set of attributes that a decision maker considers in her comparisons is not assumed to be observable. Instead, they can be uniquely identified from the choice behaviors. It extends the current understanding of some behavioral anomalies to a richer domain and proposes novel explanations of them.