Games and Decisions

"This book is written by another two brilliant people, R Duncan Luce and Howard Raiffa. The book was written in the mid-1950s, so about 10 years after von Neumann-Morgernstern and of course it’s a book that was influenced a lot by von Neumann-Morgenstern. It’s a less formal book. It’s written beautifully. It’s a book about which I’m always saying to students, “There are many ideas in there that still have not been developed.” Luce and Raiffa were thinking about elements of what we would probably now call modern choice theory. Standard classical choice theory deals with rationality, ways of applying rationality into decision problems. Their mode of thinking is natural, that’s what I like about this book (and much of game theory in general). It’s really on the bridge between natural thinking and formal thinking. Von Neumann-Morgenstern set the formal models, and Luce and Raiffa went one step back. You can see this in the subtitle of the book, Games and Decisions: Introduction and Critical Survey . The book is dedicated to the memory of von Neumann, but at the same time they did not shy away from criticising the rationality approach. By the way, von Neumann-Morgenstern was not only the beginning of game theory. There is also a very important chapter about the expected utility model. This is the basic model which is still used by almost everybody in economics regarding decision-making under uncertainty. It’s the foundation not just of game theory, but of almost everything in economic theory which involves uncertainty. Luce and Raiffa criticised this theory and suggested some ideas and alternatives which are followed up 30 to 40 years later."