Static Decision Theory Under Certainty

Larry Blume

September 22, 2010

static decision theory basics

I A set of objects X
I An individual is asked to express preferences among the
objects, or to make choices from subsets of X .
I For x , y ∈ X we can ask which, if either, is strictly preferred, that
is, the best of the two.
I If the subject says, “I prefer x to y ,” then we write x  y and say,
“x is strictly preferred to y .”
I The relation  is a binary relation.

Example 1: X = {a, b, c }, b  a, a  c, and b  c. What if the

subject also says a  b?

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static decision theory axioms

Axioms – properties that (arguably) all preference orders should

satisfy.

Asymmetry: For all x , y ∈ X , if x  y then y 6 x.

Negative Transitivity: For all x , y , z ∈ X , if x 6 y and y 6 z then
x 6 z.

Proposition: The binary relation  is negatively transitive iff x  z

implies that for all y , y  z or x  y .

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static decision theory axioms

Example 2: X = {a, b, c }, b  a, a  c and b ? c. Asymmetry and

NT you also know how b and c must be ranked.

Definition: A binary relation  is called a (strict) preference relation if

it is asymmetric and negatively transitive.

Is asymmetry a good normative or descriptive property? What about

negative transitivity.

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static decision theory weak preference

Definition: For x , y ∈ X ,
I x  y iff y 6 x;
I x ∼ y iff y 6 x and x 6 y .

Does the absence of strict preference in either direction require real

indifference or could it permit non-comparability?

Example: X = {a, b, c }. Suppose a is not ranked (by ) relative to

either b or c. If  satisfies NT, then b and c are not ranked either.

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static decision theory weak preference

Definition: The binary relation  on X is complete if for all x , y ∈ X ,

x  y or y  x.  is transitive iff for all x , y , z ∈ X , x  y and
y  z implies x  z.

Proposition: Let  be a binary relation on X .

I  is asymmetric iff  is complete.
I  is negatively transitive iff  is transitive.

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static decision theory weak preference

Proof: =⇒
I Asymmetry implies that for no pair x , y ∈ X is it true that both
x  y and y  x. Thus at least one of x 6 y and y 6 x must
hold. So at least one of x  y and y  x is true. That is,  is
complete.
I If x 6 y and y 6 z, then x 6 z. By definition we have y  x
and z  y implies z  x, so  is transitive.
⇐= will be on homework 1.

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static decision theory transitivity

Proposition: If  is a preference relation, then  is transitive.

Is transitive a useful property?

I Normative property?
I The coffee cup example.
I Without transitivity, there may be no preference maximal object
in a set of alternatives.

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static decision theory choice

Suppose that X is finite. Let P + (X ) denote the set of all non-empty

subsets of X .

Definition: A choice function is a function c : P + (X ) → P + (X )

such that for all A ∈ P + (X ), c (A) ⊆ A.

c (A) is the set of objects “chosen” from A.

Preference relations define choice functions.

Definition: For a preference relation  on X , its choice function

c : P + (X ) → P + (X ) is

c (A) = {x ∈ A : for all y ∈ A, y 6 x }.

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static decision theory choice

Things to think about:

I Show that if x , y ∈ c (A), then x ∼ y .

I Show that for all A ∈ P + (X ), c (A) 6= ∅.

The second item justifies the use of the phrase choice function to
describe c .

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static decision theory choice

For every choice function c is there a preference order  such that

c = c ?

Clearly not:

Example: X = {a, b, c }.

I c ({a, b, c }) = {a} and c ({a, b }) = {b } violates asymmetry.

I c ({a, b }) = {a} and c ({b, c }) = {b } and c ({a, c } = {c }
violates negative transitivity.

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static decision theory choice axioms

A B x

Axiom α: If x ∈ B ⊂ A and x ∈ C (A), then x ∈ C (B ).

Proposition: If  is a preference relation, then c satisfies axiom α.

Proof: Suppose there are sets A, B ∈ P + (X ) satisfying the

hypotheses, that x ∈ c (A) and x ∈
/ c (B ), Then there is a y ∈ B
such that y  x. Since B ⊂ A, y ∈ A and so x ∈ / c (A), contrary to
our hypothesis.

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static decision theory choice axioms

B A x
y

Axiom β: If x , y ∈ c (A), A ⊂ B and y ∈ c (B ), then x ∈ c (B ).

Proposition: If  is a preference relation, then c satisfies axiom β.

Proof: Since ∈ c (A) and y ∈ A, y 6 x. Since y ∈ c (B ), for all

z ∈ B, z 6 y . Negative transitivity implies that for all z ∈ B, z 6 x.
Thus x ∈ c (B ).

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static decision theory choice axioms

Axioms α and β characterize preference-based choice.

Proposition: If a choice function c satisfies axioms α and β, then

there is a preference relation  such that c = c .

Proof: Two steps

I Define a “revealed preference order”  and show that it is a
preference relation, i.e. asymmetric and negatively transitive.
I Show that c = c .

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static decision theory proof
Define a preference order: x  y iff x 6= y and c ({x , y }) = {x }.
Notice that, by definition, x 6 x.
I  is asymmetric.
Suppose not. Suppose x  y and y  x. Then
c ({x , y }) = {x } and c ({x , y }) = {y }. But both cannot be
true.

I  is negatively transitive.
Suppose that for some x , y , z ∈ X , z 6 y and y 6 x. Show
that z 6 x. That is, show that x ∈ c ({x , z }). It suffices to show
x ∈ c ({x , y , z }), because then x ∈ c ({x , z }) follows from α.

Suppose that x ∈ / c ({x , y , z }). Then one or both of y and z are

in c ({x , y , z }) because c ({x , y , z }) 6= ∅. We will show that
neither of them can be in.

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static decision theory proof

I y ∈
/ c ({x , y , z }).
Suppose y ∈ c ({x , y , z }). Axiom α implies y ∈ c ({x , y }).
Since y 6 x, x ∈ c ({x , y }). Axiom β implies x ∈ c ({x , y , z }).

I z∈
/ c ({x , y , z }).
Suppose z ∈ c ({x , y , z }). Axiom α implies z ∈ c ({y , z }).
z 6 y implies y ∈ c ({y , z }). Axiom β implies y ∈ c ({x , y , z }).

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static decision theory proof

“Revealed preferred to”  is a preference relation. Now we have to

show that for all A ∈ P + (A), c (A) = c (A).
I Suppose x ∈ c (A).
α implies x ∈ c ({x , y }) for all y ∈ A. By definition, for all
y ∈ A, y 6 x. Thus x ∈ c (A).

I Suppose ∈ c (A).
Then for all y ∈ A, y 6 x, and so x ∈ c ({x , y }). Choose
z ∈ C (A). If z 6= x, axiom α implies z ∈ c ({x , z }), so
c ({x , z }) = {x , z }. Axiom β now implies x ∈ C (A).
QED

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static decision theory WARP

An alternative characterization of preference-based choice functions:

Weak Axiom of Revealed Preference: If x , y ∈ A ∩ B and x ∈ c (A)

and y ∈ c (B ), then x ∈ c (B ) and y ∈ c (A).

This axiom is called Houthakker’s Axiom, or WARP.

Proposition: c satisfies axioms α and β iff it satisfies WARP.

Proof: ?

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static decision theory Partial Orders

We have already dissed completeness of .

Definition:  is a partial order iff it is asymmetric and transitive.

Problem: Characterize c for partial orders.

Axiom α still holds, but β may fail. See homework 1.

Now we do not want to define indifference as before, since the usual

definition expresses both indifference and non-comparability. One
could define the pair (, ∼) and theorize about the pair.

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