About the book
Ken Binmore, a game theorist, examines when Bayesian decision theory is the right guide to rational choice and when it needs to change. Leonard Savage, who invented the theory, held that it applies only in small worlds where a person can look before leaping, which would make it unsuitable for large worlds such as scientific discovery and macroeconomics. With little mathematics, Binmore explains the foundations of the theory, surveys standard theories of belief and choice when outcomes involve risk or uncertainty, and discusses philosophical views on the nature of probability. He proposes extending the theory with what he calls muddled strategies, a broader version of the mixed strategies of game theory.
Nassim Nicholas Taleb praised it for laying out the principles and axioms behind neoclassical economics with a mathematician's clarity. He said a seminar with Binmore showed him that much criticism of the foundations of decision theory attacks a strawman.
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This book has 1 recommendation
Nassim Nicholas Taleb (Flaneur)
This is a must read as it presents a comprehensive set of the principles and axioms behind neo-classical economics. Binmore is a mathematician, hence everything is mapped properly, clearly, and thoroughly.
I spent several days in a seminar with Binmore and was surprised to discover, from his arguments, that much of the criticism against the foundations of decision theory are strawman.
For the theory doesn't say what people think it says. It may have some problems (such as knowledge of probability and understanding of future payoffs) but not the problems discussed in the behavioral and heterodox literature that appear to be violated by people in their experiments.
Binmore writes the following gem: "Nor does the theory [Revealed Preferences] insist that people are selfish, as its critics mischievously maintain. It has no difficulty in modeling the kind of saintly folk who would sell the shirt off their back rather than see a baby cry".
Binmore doesn't say it explicitly, but hints that even the highly influential critiques of Amartya Sen in "Rational Fools" and elsewhere appear to be a bit strawmannish. The book is short and dense enough to be a reference.
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