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Rubinstein2005-page116

Rubinstein2005-page116 - 12:18 98 master Sheet number 114...

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October 21, 2005 12:18 master Sheet number 114 Page number 98 98 Lecture Eight Problem 4. ( Moderate ) A decision maker has a preference relation over the space of lotteries L ( Z ) having a set of prizes Z . On Sunday he learns that on Monday he will be told whether he has to choose between L 1 and L 2 (probability 1 > α > 0) or between L 3 and L 4 (probability 1 α ). He will make his choice at that time. Let us compare between two possible approaches the decision maker may take. Approach 1 : He delays his decision to Monday (“why bother with the decision now when I can make up my mind tomorrow . . . . ”). Approach 2 : He makes a contingent decision on Sunday regarding what he will do on Monday, that is, he instructs himself what to do if he faces the choice between L 1 and L 2 and what to do if he faces the choice between L 3 and L 4 (“On Monday morning I will be so busy . . . . ”). a. Formulate approach 2 as a choice between lotteries.
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