Decision Theory in the Presence of Uncertainty and Risk

The expected utility hypothesis is one of the building blocks of classical economic theory and founded on Savage's Sure-Thing Principle. It has been put forward, e.g. by situations such as the Allais and Ellsberg paradoxes, that real-life situations can violate Savage's Sure-Thing Principle and hence also expected utility. We analyze how this violation is connected to the presence of the 'disjunction effect' of decision theory and use our earlier study of this effect in concept theory to put forward an explanation of the violation of Savage's Sure-Thing Principle, namely the presence of 'quantum conceptual thought' next to 'classical logical thought' within a double layer structure of human thought during the decision process. Quantum conceptual thought can be modeled mathematically by the quantum mechanical formalism, which we illustrate by modeling the Hawaii problem situation, a well-known example of the disjunction effect, and we show how the dynamics in the Hawaii problem situation is generated by the whole conceptual landscape surrounding the decision situation.

Journal of Mathematical Economics, 2018

Because of its mathematical elegance and simplicity, manageability and predictive success, expected utility theory (EUT) provides both the normative and descriptive foundations of decision-making under uncertainty. Following distinction between 'objective uncertainty' (or 'risk') and 'subjective uncertainty' (or 'ambiguity'), von provided for an axiomatic framework which defined EUT using objective probability. and then Anscombe and Aumann (1963) further generalized EUT also in an axiomatic way. Boolean logic , and Bayesian probability theory, axiomatized by , provide for mathematical structures which have been, and currently still are, at the heart of modelling human rational behavior in the presence of uncertainty. Although the economics and finance literature supplies numerous examples where EUT can be seen to work well, the economics profession is well aware of paradoxes such as the paradox and Ellsberg's (1961) 'ambiguity aversion', and the profession is equally aware of the usefulness of non-expected utility theory in resolving some well documented empirical puzzles in finance. and provide extensive reviews of non-expected utility theory, while and Ma (2011) cover non-expected utility theory for its applications in asset pricing theory.

Operations Research, 2013

In physics, at the beginning of the twentieth century it was recognized that some experiments could not be explained by the conventional classical mechanics, but the same could be explained by the newly discovered quantum theory. It resulted in a new mechanics called quantum mechanics that revolutionized scientific and technological developments. Again, at the beginning of the twenty-first century, it is being recognized that some experiments related to the human decision-making processes could not be explained by the conventional classical decision theory but the same could be explained by the models based on quantum mechanics. It is now recognized that we need quantum mechanics in psychology as well as in economics and finance. In this paper we attempt to advance and explain the present understanding of applicability of quantum mechanics to the human decision-making processes. Using the postulates analogous to the postulates of quantum mechanics, we show the derivation of the quan...

2012

The expected utility hypothesis and Savage's Sure-Thing Principle are violated in real life decisions, as shown by the Allais and Ellsberg paradoxes. The popular explanation in terms of ambiguity aversion is not completely accepted. As a consequence, uncertainty is still problematical in economics. To overcome these difficulties a distinction between risk and ambiguity has been introduced which depends on the existence of a Kolmogorovian probabilistic structure modeling these uncertainties. On the other hand, evidence of everyday life suggests that context plays a fundamental role in human decisions under uncertainty. Moreover, it is well known from physics that any probabilistic structure modeling contextual interactions between entities structurally needs a non-Kolmogorovian framework admitting a quantum-like representation. For this reason, we have recently introduced a notion of contextual risk to mathematically capture situations in which ambiguity occurs. We prove in this paper that the contextual risk approach can be applied to the Ellsberg paradox, and elaborate a sphere model within our hidden measurement formalism which reveals that it is the overall conceptual landscape that is responsible of the disagreement between actual human decisions and the predictions of expected utility theory, which generates the paradox. This result points to the presence of a quantum conceptual layer in human thought which is superposed to the usually assumed classical logical layer, and conceptually supports the thesis of several authors suggesting the presence of quantum structure in economics and decision theory.

International Journal of Theoretical Physics, 2019

Ellsberg thought experiments and empirical confirmation of Ellsberg preferences pose serious challenges to subjective expected utility theory (SEUT). We have recently elaborated a quantum-theoretic framework for human decisions under uncertainty which satisfactorily copes with the Ellsberg paradox and other puzzles of SEUT. We apply here the quantum-theoretic framework to the Ellsberg two-urn example, showing that the paradox can be explained by assuming a state change of the conceptual entity that is the object of the decision (decision-making, or DM, entity) and representing subjective probabilities by quantum probabilities. We also model the empirical data we collected in a DM test on human participants within the theoretic framework above. The obtained results are relevant, as they provide a line to model real life, e.g., financial and medical, decisions that show the same empirical patterns as the two-urn experiment.

SSRN Electronic Journal, 2010

In physics, at the beginning of the twentieth century it was recognized that some experiments could not be explained by the conventional classical mechanics but the same could be explained by the newly discovered quantum theory. It resulted into a new mechanics called quantum mechanics that revolutionized the scientific and technological developments. Again at the beginning of the twenty-first century, it is being recognized that some experiments related with the human decision making processes could not be explained by the conventional classical decision theory but the same could be explained by the models based on quantum mechanics. It is now recognized that we need quantum mechanics in psychology as well as in economics and finance. In this paper we attempt to advance and explain the present understanding of applicability of quantum mechanics to the human decision making processes. Using the postulates analogous to the postulates of quantum mechanics, we show the derivation of the quantum interference equation to illustrate the quantum approach. The explanation of disjunction effect experiments of Tversky and Shafir(1992) has been chosen to demonstrate the necessity of a quantum model. Further to suggest the possibility of application of the quantum theory to the business related decisions, some terms such as price operator, state of mind of the acquiring firm, etc. are introduced and discussed in context of the merger/acquisition of business firms. The possibility of the development in the areas such as quantum finance, quantum management, application of quantum mechanics to the human dynamics related with health care management, etc. is also indicated.

2013

Humans do not always make the most rational decisions. As studies have shown, even when logic and reasoning point in one direction, sometimes humans “walk” to the opposite route, motivated by personal bias or simply "wishful thinking." This paradoxical human behavior has resisted explanation by classical decision theory for over a decade. Scientists have shown that a quantum probability model can provide a simple explanation for human decision-making. In military, decision-making process is considered to be the most neuralgic one. With the recent interest in quantum computing and quantum information theory, there has been an effort to recast classical game theory using quantum probability amplitudes, and hence study the effect of quantum superposition, interference and entanglement on the agents’ optimal strategies. Apart from unsolved problems in quantum information theory, quantum game theory and decision –making, may be useful in studying quantum communication since tha...

This article introduces the concept of Quantum Economics, a novel field that applies quantum mechanics to economic theory and practice. It explores the theoretical foundations, potential applications, and challenges of this paradigm. Quantum Economics draws inspiration from quantum mechanics, incorporating principles like superposition, entanglement, and uncertainty into economic analysis. It investigates the potential of quantum computing in enhancing financial modeling, offering more accurate economic predictions. The text also discusses how economic variables can exhibit similarities to entangled quantum particles, leading to a deeper understanding of market dynamics and systemic risk. Real-world applications of Quantum Economics, including portfolio optimization and supply chain management, are highlighted. However, the article also recognizes the challenges associated with implementing quantum principles in economics. In summary, this article provides an overview of Quantum Economics, showcasing its potential for transforming economic analysis while acknowledging the existing challenges. It serves as an introduction to a cutting-edge interdisciplinary field with implications for the future of economic research and practice.

PLOS ONE, 2016

Quantum decision theory (QDT) is a recently developed theory of decision making based on the mathematics of Hilbert spaces, a framework known in physics for its application to quantum mechanics. This framework formalizes the concept of uncertainty and other effects that are particularly manifest in cognitive processes, which makes it well suited for the study of decision making. QDT describes a decision maker's choice as a stochastic event occurring with a probability that is the sum of an objective utility factor and a subjective attraction factor. QDT offers a prediction for the average effect of subjectivity on decision makers, the quarter law. We examine individual and aggregated (group) data, and find that the results are in good agreement with the quarter law at the level of groups. At the individual level, it appears that the quarter law could be refined in order to reflect individual characteristics. This article revisits the formalism of QDT along a concrete example and offers a practical guide to researchers who are interested in applying QDT to a dataset of binary lotteries in the domain of gains.

Theory and Decision, 2018

Quantum cognition is a recent and rapidely growing field. In this paper we develop an expected utility theory in a context of non-classical (quantum) uncertainty. We replace the classical state space with a Hilbert space which allows introducing the concept of quantum lottery. Within that framework we formulate sufficient and necessary axioms on preferences over quantum lotteries to establish a representation theorem. We show that demanding the consistency of choice behavior conditional on new information is equivalent to the von Neuman-Lüders postulate applied to beliefs. In our context, dynamic consistency is shown not to secure Savage's Sure Thing Principle (in its dynamic version). Finally, we discuss the interpretation and value of our results for rationality and behavioral economics.