Leadership

Priors And Desires: A Model Of Payoff-dependent Beliefs

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Executive Summary

Whatever a person wants to be true affects what she believes to be true, and consequently the decisions she makes. This paper introduces an axiomatic model of decision making that allows for this possibility, and uses a number of simplifying assumptions to derive a generally applicable formal representation. In the resulting representation the payoff in an event affects beliefs as if it were part of the evidence about its likelihood. A single parameter determines both the direction and weight of this 'Evidence', with positive values corresponding to optimism, and negative values to pessimism. Changes to the payoff consequences of an event amount to new 'Evidence', and can alter beliefs even in the absence of new information.

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