States of Nature and States of Mind: A generalized theory of decision-making

Abstract

Canonical economic agents act so as to maximize a single, representative, utility function. However, there is accumulating evidence that heterogeneity in thought processes may be an important determinant of individual behavior. This paper investigates the implications of a vector-valued generalization of the Expected Utility paradigm, which permits agents either to deliberate as per Homo economics, or to act impulsively. This generalized decision theory is applied to explain the crowding-out effect, irrational educational investment decisions, persistent social inequalities, the pervasive influence of non-cognitive ability on socio-economic outcomes, and the dynamic relationships between non-cognitive ability, cognitive ability, and behavioral biases. These results suggest that the generalized decision theory warrants further investigation.