Skip to main content

LUP Student Papers

LUND UNIVERSITY LIBRARIES

A General Framework of Flawed Decision Making

Bågfelt, Thimmy LU (2014) NEKN01 20141
Department of Economics
Abstract
Ubiquitous empirical evidence suggests that economic agents strive towards but often fail to maximize utility. Yet there is no consensus on how to best model deviations from optimal behaviour. This paper reviews and analyses the foundation of the utility maximization model and proposes a more general framework that is consistent with – but also allows for deviations from – utility maximization. The framework assumes a complete, reflexive, transitive and continuous binary preference relation, guaranteeing the existence of a utility function. This approach provides a clear theoretical perspective on behaviour that appears to be inconsistent with utility maximization. When applied to a standard supply-demand schedule, the framework implies... (More)
Ubiquitous empirical evidence suggests that economic agents strive towards but often fail to maximize utility. Yet there is no consensus on how to best model deviations from optimal behaviour. This paper reviews and analyses the foundation of the utility maximization model and proposes a more general framework that is consistent with – but also allows for deviations from – utility maximization. The framework assumes a complete, reflexive, transitive and continuous binary preference relation, guaranteeing the existence of a utility function. This approach provides a clear theoretical perspective on behaviour that appears to be inconsistent with utility maximization. When applied to a standard supply-demand schedule, the framework implies that market clearing quantities are inefficiently low, even when agents make optimal decisions on average but deviate from optimal decisions in general. (Less)
Please use this url to cite or link to this publication:
author
Bågfelt, Thimmy LU
supervisor
organization
course
NEKN01 20141
year
type
H1 - Master's Degree (One Year)
subject
keywords
irrationality, bounded rationality, utility maximization, behavioural economics, cognitive bias
language
English
id
4462776
date added to LUP
2014-06-23 10:43:31
date last changed
2014-06-23 10:43:31
@misc{4462776,
  abstract     = {{Ubiquitous empirical evidence suggests that economic agents strive towards but often fail to maximize utility. Yet there is no consensus on how to best model deviations from optimal behaviour. This paper reviews and analyses the foundation of the utility maximization model and proposes a more general framework that is consistent with – but also allows for deviations from – utility maximization. The framework assumes a complete, reflexive, transitive and continuous binary preference relation, guaranteeing the existence of a utility function. This approach provides a clear theoretical perspective on behaviour that appears to be inconsistent with utility maximization. When applied to a standard supply-demand schedule, the framework implies that market clearing quantities are inefficiently low, even when agents make optimal decisions on average but deviate from optimal decisions in general.}},
  author       = {{Bågfelt, Thimmy}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{A General Framework of Flawed Decision Making}},
  year         = {{2014}},
}