| Chapter 2 Rational utility theory: Needs several course of action, uncertainty about the events, ability to evaluate consequences Rational expectations principle: utility = sum of (probabilities x values) Utility: average payoff if game played an infinite amount of time When gains are at stake people are risk aversive When losses are at stake people tend to be risk seeking Framing effects Psychological accounting Decisions are influenced depending on whether people perceive costs as coming from one or several accounts People think more in terms of ratios than in terms of additions Rational utility theory ignores personal values of outcome and situational factors Decision tree diagram: map decisions, uncertain events with their estimated probability, and personal values of outcomes |
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