Unformatted text preview: ayoﬀ”.
Payoﬀ here need not be monetary payoﬀ. Social and psychological
factors inﬂuence payoﬀs and decisions.
Nevertheless, the rational decision-making paradigm is useful because it
provides us with a (testable) theory of economic and social decisions. We often need only ordinal information; i.e., two options a and b ,
and we imagine a preference relation � that represents the ranking of
diﬀerent options, and we simply check whether a � b or a � b .
But in game theory we often need cardinal information because
decisions are made under natural or strategic uncertainty. The theory
of decision-making under uncertainty was originally developed by
John von Neumann and Oskar Morgenstern. 4 Game Theory: Lecture 2 Introduction Decision-Making under Uncertainty
von Neumann and Morgenstern posited a number of “reasonable”
axioms that rational decision-making under uncertainty should satisfy.
From these, they derived the expected utility theory.
Under uncertainty, every choice induces a lottery, that is, a probability...
View Full Document
- Spring '10
- Game Theory