Risk and Rationality

Abstract

This book is about the principles that govern rational decision-making in the face of risk. A distinctive feature of these decisions is that individuals are forced to consider how their choices will turn out under various circumstances, and decide how to trade off the possibility that a choice will turn out well against the possibility that it will turn out poorly. The orthodox view is that there is only one acceptable way to do this: rational individuals must maximize expected utility. The contention of this book, however, is that the orthodox theory (expected utility theory) dictates an overly narrow way in which considerations about risk can play a role in an individual’s choices. This book argues for an alternative, more permissive, theory of decision-making: one that allows individuals to pay special attention to the worst-case or best-case scenario. This theory, risk-weighted expected utility theory, better captures the preferences of actual decision-makers. Furthermore, contra the orthodox view, it is argued that decision-makers whose preferences can be captured by risk-weighted expected utility theory are rational. This book combines research from economics and research from philosophy.