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The lottery ′ is, in effect, a lottery in which the best outcome is won with probability (), and the worst outcome otherwise. Hence, if u ( M ) > u ( L ) {\displaystyle u(M)>u(L)} , a rational decision maker would prefer the lottery M {\displaystyle M} over the lottery L {\displaystyle L} , because it gives him a larger chance to win the best ...
The zero effect is a slight adjustment to the certainty effect that states individuals will appeal to the lottery that doesn't have the possibility of winning nothing (aversion to zero). During prior Allais style tasks that involve two experiments with four lotteries, the only lottery without a possible outcome of zero was the zero-variance ...
Individuals make no difference to the outcome, “much as single molecules make no difference to the properties of the gas" [citation needed] (Herbert, G). This is a weakness of rational choice theory as it shows that in situations such as voting in an election, the rational decision for the individual would be to not vote as their vote makes ...
He proposed that a nonlinear function of utility of an outcome should be used instead of the expected value of an outcome, accounting for risk aversion, where the risk premium is higher for low-probability events than the difference between the payout level of a particular outcome and its expected value. Bernoulli further proposed that it was ...
Constitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of "the economic analysis of constitutional law" to explain the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political ...
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Positive economics as a science concerns the investigation of economic behavior. [4] It deals with empirical facts as well as cause-and-effect relationships. It emphasizes that economic theories must be consistent with existing observations and produce precise, verifiable predictions about the phenomena under investigation.
Lucas’ paper “Expectations and the Neutrality of Money” expands on Muth's work and sheds light on the relationship between rational expectations and the monetary policy. The paper argues that when individuals hold rational expectations, changes in the money supply do not have real effects on the economy and the neutrality of money holds.