How do people make decisions, and what does ‘utility’ really capture? This chapter reviews the classical, utility-based foundations of decision theory (risk vs uncertainty, expected utility, maximin/minimax regret) and introduces a programme that aims to understand how utility is computed. It formalises economic and experimental economic decisions and games, emphasising a key methodological innovation: linguistic instructions are integral to the decision problem and shape utility, a point the book develops to quantify language-based utility using large language models. The chapter reviews systematic violations of payoff maximisation in one-shot and anonymous interactions: (i) bounded rationality; (ii) heuristics and biases (loss-aversion, endowment, status quo, present biases); and (iii) social preferences revealed in altruism, cooperation, trust, fairness and altruistic punishment, the equity–efficiency trade-off, and truth-telling. Together these regularities motivate behavioural economics and the search for utility functions that extend beyond payoff maximisation, to include social welfare, equity, and – critically – language.

The character of the State of Nature that humanity sought to escape divided natural philosophers. There was a sharp reaction against the pessimism of Hobbes’s Leviathan and Mandeville’s Fable of the Bees. The end result of a long process was the development of the ethical theory of utilitarianism: ‘it is the greatest happiness of the greatest number that is the measure of right and wrong’ (Bentham). The seed-bed of utilitarianism was the idea of utility; but utility is an empty vessel, with no fixed or clear definition. During the eighteenth century, happiness became its preferred content. The role of Hutcheson was key here: he coined the phrase (in 1725) that became the Benthamite slogan, and pioneered the application of mathematics to moral philosophy. Later thinkers, notably Helvétius, were less optimistic than Hutcheson, arguing that mankind was not by nature benevolent, but self-interested: it was thus incumbent on legislators to raise the sights of the citizenry to embrace the interests of the whole society. In this Beccaria followed the lead of Helvétius.

This chapter provides a systematic introduction to the book.

Prospect theory is a descriptive model that was developed by behavioral researchers Daniel Kahneman and Amos Tversky. According to prospect theory, people will subjectively value a loss of a fixed amount as more than a gain of the same amount. Gains and losses are not perceived in absolute value, but instead are determined based on a perceived reference or zero point.

According to prospect theory, when offered a gain, people will prefer a sure gain to a risky gain with the same expected value, but when facing a loss, they will prefer a risky loss to a sure loss of the same expected value. People will overweight low probabilities and therefore overestimate the utility expected (positive or negative) of low-probability events.

Decision theory and decision making are multidisciplinary topics. Decision theory includes psychology, especially cognitive psychology, because decisions are cognitive processes. Decision theory also includes math, especially probability, as people often make decisions based on likelihood. Decision making is an applied topic pertaining to business, engineering, science, politics, other disciplines, and of course to personal decisions.

Descriptive models of decision theory explain decisions as cognitive processes, how and why people make the choices they do. Normative decision models describe how people should conceptualize a decision. Prescriptive models include mathematically based analyses that provide actionable solutions to real-world problems.

Decisions are made in one of three environments. Under certainty, the decision maker can make a choice and be sure what the outcome will be. Under risk, the decision maker will make a choice knowing in advance the probabilities of various outcomes. Under uncertainty, the possible outcomes and probabilities are unknown.

This chapter investigates one-person decision problems under uncertainty. The main building block is that of a conditional preference relation: a mapping that assigns to every belief about the states a preference relation over the decision maker’s choices. Under certain conditions, such a conditional preference relation admits an expected utility representation, which allows us to summarize the conditional preference relation by a finite utility matrix. Throughout the book it is assumed that the conditional preference relation indeed has an expected utility representation.

The philosophy of science suggests that, on a fundamental level, a scientific theory is only a good theory to the extent that it fulfils a set of basic criteria of adequacy. The study of the predictive mind thus should benefit from an examination and evaluation of the extent to which theories of prediction adhere to these ground rules. There are six reasonable criteria further elucidated in this chapter that are useful to assess the merit of a theory. These criteria are far from perfect benchmarks but, considered as a whole, provide a useful guideline to evaluate theories of prediction. Six criteria are applied to theories of prediction in the remainder of the book. These are: parsimony and simplicity, theoretical precision and mechanistic specificity, testability and predictive power, falsifiability, test of time, and utility. The credibility of a scientific theory is also intrinsically connected to the credibility of the experimental evidence supporting it. This book uses three criteria that provide good benchmarks: the reliability, generalizability, and the validity of the experimental evidence that has been collected.

In this chapter, we argue that while it has often been suggested that utility models are a product of late nineteenth-century German thinking and that they are foreign to the United Kingdom, utility model protection was first introduced to the United Kingdom in the Utility Designs Act 1843. As such, it is clear that utility model protection has a long established (albeit somewhat tarnished) pedigree in British law and that utility model protection came into force in the United Kingdom some fifty years before its German counterpart. In this chapter we highlight the key features of the Utility Designs Act 1843, the way the Act was received, and speculate on the reasons why the Act was forgotten

Long was committed to a depiction of Jamaica as a successful ‘commercial society’ where white people could live comfortably on the labour of the enslaved. He mapped the island for his readers in such a way as to reassure them that the boundaries between the free and the unfree were secure. His picture provided a full account of island defences, against both external and internal enemies. He drew on his favourite English poets and writers to inspire poetic renditions of the beauties of this tropical paradise in which art and nature combined their glories. The island’s fecundity was there to be harnessed for profit. His racialized cartography utilized maps, engravings, tables and listings of commodities to illustrate boundless potential. Nature could be improved, tamed and catalogued, as people were. Alarming tales of colonists’ mortality could be challenged, mosquitoes kept at bay. White settlers could live a healthy life if only they would embrace moderation in all things. As an Enlightenment man and an enthusiastic reader of natural histories, Long was keen to represent the island as en route to a more civilized and ordered state, with more roads, more maps, more barracks, more settlements. But, he had to admit, it was a society sorely in need of more public virtue.

This chapter introduces the basics of the economic approach to understanding decision-making. This is done using examples drawn from consumer decision-making in the context of healthcare. Topics include how to think about preferences, different types of costs, optimization, and the importance of perceptions. The end of chapter supplement discusses how to use price indexes.

This chapter focuses in on how individuals invest in or harm their health. This is done using the concept of the health production function. Various inputs to the function such as medical care, illness and injury, lifestyle choices, age, genetics, and environmental factors are discussed along with their interactions with each other. Key health economics concepts such as the flat of the curve, the tradeoff between health and utility, and the role of technological innovation in medical care effectiveness are discussed, as well as the key economic concept of the margin. The end of chapter supplement introduces the concept of standardized units for measuring effectiveness of care.

Why people do or do not change their beliefs has been a long-standing puzzle. Sometimes people hold onto false beliefs despite ample contradictory evidence; sometimes they change their beliefs without sufficient reason. Here, I propose that the utility of a belief is derived from the potential outcomes of holding it. Outcomes can be internal (e.g., positive/negative feelings) or external (e.g., material gain/loss), and only some are dependent on belief accuracy. Belief change can then be understood as an economic transaction, in which the multidimensional utility of the old belief is compared against that of the new belief. Change will occur when potential outcomes alter across attributes, for example due to changing environments, or when certain outcomes are made more or less salient.