ABSTRACT: Bernoulli’s framework of expected utility serves as a model for various psychological processes, including motivation, moral sense, attitudes, and decision making. To account for evidence at variance with expected utility, we generalize the framework of fast and frugal heuristics from inferences to preferences. The priority heuristic predicts (i) Allais’ paradox, (ii) risk aversion for gains if probabilities are high, (iii) risk seeking for gains if probabilities are low (lottery tickets), (iv) risk aversion for losses if probabilities are low (buying insurance), (v) risk seeking for losses if probabilities are high, (vi) certainty effect, (vii) possibility effect, and (viii) intransitivities. We test how accurately the heuristic predicts people’s choices, compared to previously proposed heuristics and three modifications of expected utility theory: security-potential/aspiration theory, transfer-of-attention-exchange model, and cumulative prospect theory.
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[…] those who operate with such theories do not apply them naively. For it is by no means certain that fully decentralized markets actually exist — markets, that is, that are motivated by self-interest, guided by price signals, and guarantee a perfect distribution of economic resources. The less such abstractions apply to the confused situations that prevail in the real world, the greater is the intellectual onus on political economy to demonstrate that even if there are no such things as ideal markets they nonetheless could exist. In other words, while the assumptions behind such markets may not be “realistic,” they do at least stand a chance of being realized. […] It may be possible to detect the workings of a social imaginary in all this, by which we mean those efficacious fictions [p.35] which inform the self-understanding of societies, coordinate social and symbolic practices, and provide intuitively justified images or self-evident truths to determine how society functions and which options for action are available at any given time.
Joseph Vogl, The Specter of Capital (Stanford: Stanford University Press, 2015), pp.35-36.