Rational Choice (MIT Press)

Itzhak Gilboa

Language: English

Pages: 176

ISBN: 0262518058

Format: PDF / Kindle (mobi) / ePub

This book offers a rigorous, concise, and nontechnical introduction to some of the fundamental insights of rational choice theory. It draws on formal theories of microeconomics, decision making, games, and social choice, and on ideas developed in philosophy, psychology, and sociology. Itzhak Gilboa argues that economic theory has provided a set of powerful models and broad insights that have changed the way we think about everyday life. He focuses on basic insights of the rational choice paradigm--the general conceptualization rather than a particular theory--that survive recent (and well-justified) critiques of economic theory's various failures. Gilboa explains the main concepts in language accessible to the nonspecialist, offering a nonmathematical guide to some of the main ideas developed in economic theory in the second half of the twentieth century. Chapters cover feasibility and desirability, utility maximization, constrained optimization, expected utility, probability and statistics, aggregation of preferences, games and equilibria, free markets, and rationality and emotions. Online appendixes offer additional material, including a survey of relevant mathematical concepts.

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their ratios. These turn out to be independent of the particular function chosen. The marginality principle is a condition, stated in terms of marginal utilities, that is closely related to optimal solutions. It is therefore an extremely powerful tool in identifying solutions. More concretely, under certain assumptions (see appendix B), a solution is optimal if it satisfies the following condition: for each product, the ratio of the marginal utility to price is the same. To see the logic of

of affairs, we can ask how much of a coincidence needs to be assumed to reconcile the data with the null hypothesis. That is, if we do give H0 the benefit of the doubt and assume it is true, how likely would it be to observe that which we have indeed observed? If the answer is extremely unlikely, we end up rejecting H0, thereby proving the alternative. In other words, the basic logic of hypothesis testing is similar to showing that it is embarrassing or ridiculous to hold on to the negation of

off if one is exempt from following the law, whether others follow it or not. When such a situation is identified, even a liberal-minded person might support legislation that curbs individual rights. But laws may be complicated to pass and to enforce. Often, social norms can serve the same purpose at a much lower cost. Suppose you drive down the road and honk or litter. You may be breaching a law, but it can be quite complicated to get you prosecuted and convicted. It is much simpler to frown at

trade would still take place. Suppose that the cars are lemons or plums with equal probability and that the buyers and sellers are expected value maximizers. Then the sellers would sell something that is worth to them, in expectation, $7,500, and the buyers would get something that is worth to them, in expectation, $9,000. If the price were between $7,500 and $9,000, trade would take place. Indeed, this is the range where the equilibrium price should be, and Pareto optimality would hold. This

Economic Perspectives 9 (1995): 39–49. 5. A. Gibbard, “Manipulation of Voting Schemes: A General Result,” Econometrica 41 (1973): 587–601; M. A. Satterthwaite, “Strategy-Proofness and Arrow’s Conditions: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions,” Journal of Economic Theory 10 (1975): 187–217. 6. See P. Mongin, “Spurious Unanimity and the Pareto Principle,” paper presented at the Conference of the International Society for Utilitarian Studies

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