Overview
Choice occurs when an agent is faced with a set of alternatives from which they must choose. Understanding how individuals make the choices that drive economic decisions is a cornerstone of micro-economic thought. In order to make precise statements about choice, the theory is formulated in a rather formal, mathematical framework.
Option Set
The first step of choice theory is to postulate that the options that an agent may choose from, are each distinct, and can all be gathered together as a collection or set. The idea of a set is formally defined within the context of set theory.
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 opportunities.
- Reservation Price
- Stochastic Dominance
- Optimal Control - Decision Making over Time
- Game Theory - competitive decision making