A Generalisation of Rational Behaviour

Abstract

In modern economic theory, we often need to represent behaviour of agents making decision under uncertainty. Some of the situations of uncertainty cannot be taken into account by usual theories of rational behaviour. For instance, in the theory of insurance, a situation of moral hazard may prevail where the probability of accident depends on the decision of the person insured. Dependance on the decision of the distribution over uncertain states of the world, is a situation which is encountered in most dynamic models where future uncertainty depends on present decisions. Axioms used in Savage’s theory [1956] rule out these situations [and others]. Drèze C1905] discusses this problem in detail.