Showing papers on "Von Neumann–Morgenstern utility theorem published in 2019"

von Neumann-Morgenstern and Savage Theorems for Causal Decision Making

Abstract: Causal thinking and decision making under uncertainty are fundamental aspects of intelligent reasoning. Decision making under uncertainty has been well studied when information is considered at the associative (probabilistic) level. The classical Theorems of von Neumann-Morgenstern and Savage provide a formal criterion for rational choice using purely associative information. Causal inference often yields uncertainty about the exact causal structure, so we consider what kinds of decisions are possible in those conditions. In this work, we consider decision problems in which available actions and consequences are causally connected. After recalling a previous causal decision making result, which relies on a known causal model, we consider the case in which the causal mechanism that controls some environment is unknown to a rational decision maker. In this setting we state and prove a causal version of Savage's Theorem, which we then use to develop a notion of causal games with its respective causal Nash equilibrium. These results highlight the importance of causal models in decision making and the variety of potential applications.

Using Prospect Theory to Determine Investor Risk Aversion

Abstract: The prospect theory model developed by Daniel Kahnemann and Amos Tversky in 1979 is now widely recognized as providing more empirically valid explanations of decision-making under uncertainty than the classical von Neumann-Morgenstern paradigm of expected utility maximization. However, despite compelling potential use cases, industry applications of prospect theory remain scarce. Following an outline of the shortcomings of classical expected utility theory and some key tenets of prospect theory, we discuss how prospect theory can be used in practice to obtain meaningful estimates of investor risk preferences. We then conclude with a case study of the digital investment management firm LIQID and its use of prospect theory as a decision support tool for its clients.