Costs of abandoning the Sure-Thing Principle

Abstract

Risk-weighted expected utility theory (REU theory for short) permits preferences which violate the Sure-Thing Principle (STP for short). But preferences that violate the STP can lead to bad decisions in sequential choice problems. In particular, they can lead decision-makers to adopt a strategy that is dominated – i.e. a strategy such that some available alternative leads to a better outcome in every possible state of the world.

Keywords:

• Risk-weighted expected utility
• Sure-Thing Principle
• expected utility
• decision theory
• allais paradox

Notes

1 More precisely, as long as Strategy 1 weakly dominates Strategy 2, and the set of states in which Strategy 1 yields a strictly better outcome than Strategy 2 is greater than 0, the REU of Strategy 1 will be strictly greater than the REU of strategy 2 at the first node of the decision tree.

Additional information

Funding

This work was supported by the Stanford University.