TRADITIONAL AND ALTERNATIVE MODELS OF INDIVIDUAL BEHAVIOR UNDER UNCERTAINTY

Abstract

Although the basic model of consumer theory describes a wide variety of situations. many problems of consumer choice cannot be analyzed without same important modification of the model. In this paper we will examine tradional and alternative models that have been developed to explain the eHeet of uncertain individual behavior. Since risk and uncertainty require reexaminatlon of individual preferences we will shortly review basic ooncepts as a first step in the paper. To do so, we begin wlth the conepts of probability
and expected value in Section 2. This section also involves the proposition that individuals act to maxlrnlze expected utility known as the expected utillty hypothesis. What follows this as Section 3 is naturally the Von Neumann- Morgenstern utility approach which essentially assests that consumers will behave so as to maxlimize their expected utllity. Before going further, one should dfferentiate a risk averse and risk seeker individual since the response to uncertainty depends not only on how people thlnk about it but also on
the set of possible responses. Section 4, therefore, basically deals with this issue.
However, there are many situations in which individual responses to uncertainty do not seem to be rnodeled well by the expected utllity approach. Some situatlons may be better considered by concepts from the theory of games against persons. We will illustrate this by considering Slumlord's Dilemma and Prisoner's Dilemma. On the other hand behavior in same other situations may be better modeled by oonsidering the concept of bounded rationality. These models are discussed in Section 5 named as alternatlve models of lndividual behavior underuncertalnty.

Keywords

• individual behaviour

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