Contents
A Brief Outline of the Chapters xvii
1.Decision Theory 1
1.1 Introduction 1
1.2 Preferences and Optimal Choices 3
1.3 Decisionmaking under Risk 5
1.3.1 von Neumann-Morgenstern preferences 6
1.3.2 Other preference specifications 8
1.4 The State Preference Model 13
1.5 Decisionmaking under Uncertainty 14
1.5.1 Objections to the theory 16
1.5.2 Other preference specifications 17
Bibliography 19
2.Preferences, Risk, and Stochastic Dominance 21
2.1 Introduction 21
2.2 von Neumann-Morgenstern Preferences and Risk 23
2.2.1 Risk aversion: some relations 23
2.2.2 Risk aversion and behavior: asset choice 25
2.3 Risk Aversion and the State Preference Model 27
2.4 Stochastic Dominance 29
2.4.1 Stochastic dominance and distribution functions 29
2.4.2 Stochastic dominance and preferences 30
2.5 Equivalence of Dominance Criteria 30
2.5.1 Equal means: mean preserving spreads 32
2.5.2 Higher order stochastic dominance 33
2.5.3 Stochastic dominance and risk aversion 33
2.5.4 Likelihood ratios and hazard rates 34
2.5.5 Dominance in terms of semideviations 35
2.5.6 Conditional stochastic dominance and monotone likelihood ratios 38
Bibliography 38
3.Strategic Form Games 39
3.1 Introduction 39
3.2 Strategies 40
3.3 Solutions 41
3.3.1 Maxmin choices 41
3.3.2 Dominant strategies 42
3.3.3 Rationalizability 43
3.3.4 Evolutionary stable strategies 44
3.4 NashE quilibrium 45
3.5 Correlated Equilibrium 47
Bibliography 53
4.Nash Equilibrium—Existence and Refinements 55
4.1 Introduction 55
4.2 NashE quilibrium 56
4.3 Existence of Equilibrium 57
4.3.1 Fixed points 58
4.3.2 Equilibrium 59
4.4 Perfect Equilibrium 60
4.5 Proper Equilibrium 61
4.6 Persistent Equilibrium 63
Bibliography 64
5.Mechanism Design 65
5.1 Introduction 65
5.2 Mechanisms 66
viii CONTENTS
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