Rational Choice
Overview
Choice occurs when an agent is faced with a set of alternatives from which they must choose.
Economics is based on the ability of agents in the economy to choose which products to buy and produce.
As such, the theory of choice is a cornestone of economic thought. The current theory of rational choice
is formulated within a mathematical framework.
Option Set
The first step of choice theory is to postulate that
the options that an agent may choose among forms a set. That is, they are collected into a
mathematical set.
Preference Relation
Given a choice set X. A preference is a
relation
on the set X.
- A preference relation is complete if for every x and y in X,
either {% x \succsim y %} or {% y \succsim x %}
- A preference relation is transitive if {% x \succsim y %}
and {% y \succsim z %} implies that {% x \succsim z %}
Topics
- Utility is a method for doing calculations using
a preference relation as defined above. It translates questions of preferences into questions about number.
- Risk is a variation on the choice framework which deals with
choices that involve choices over uncertain outcomes. Typically this involves choices which translate into future
outcomes, which by definition will be uncertain. The most common application is the application of the choice
paradigm to investment oppurtunities.
- Reservation Price
- Stochastic Dominance
