Decision Theory 301

This is complementary to the previous post, "Decision Theory 101 (link)." In Appendix A: Optimal Choice, the author (Professor Gilboa) concisely explains the flexibility of rational choice framework. I think that his argument is really important especially when we evaluate the recent developments of behavioral economics and consider its relationship with the traditional (or rational) approach.

For our purposes, it is worthwhile highlighting what this model (the consumers' problem: by yyasuda) does not include. Choices are given as quantities of products. Various descriptions of the products, which may be part of their frames, are not part of the discussion. The utility function measures desirability on a scale. We did not mention any special point on this scale, such as a reference point. Further, choices are bundles of products to be consumed by the consumer in question at the time of the problem. They do not allow us to treat a certain bundle differently based on the consumer's history of consumption, or on the consumption of others around them. Hence, the very language of the model assumes that the consumer does not care what others have, they feel no envy, nor any disappointment in the case when their income drops as compared with last period, and so on.

It is important to emphasize that the general paradigm of rational choice does not necessitate these constraints. For instance, instead of the n products the consumer can consume today, we may have a model with 2n products, reflecting their consumption today and their consumption yesterday. This would allow us to specify a utility function u that takes into account considerations such as aspiration levels, disappointment, and so forth. Or, we can use more variables to indicate the average consumption in the consumer's social group, and then the utility function can capture social considerations such as the consumer's ranking in society and so forth. Indeed, such models have been suggested in the past and have become more popular with the rise of behavioral economics. These models show that the paradigm of rational choice is rather flexible. Yet, the specific theory restricts the relevant variables to be independent of history, others' experiences, emotions, and other factors which might be among the determinants of well-being.