Hypothetical Expected Utility

TL;DR

This paper introduces a model to analyze hypothetical reasoning in decision makers, linking their ability to recognize implications to their propensity for hypothetical thinking, and provides a method to identify this from economic data.

Contribution

It offers a formal model connecting hypothetical reasoning to implication recognition and a methodology to detect this reasoning from observable data.

Findings

Hypothetical reasoning is captured by implication recognition ability.

The model provides a way to identify flawed hypothetical reasoning.

Observable behavior reflects the propensity for hypothetical thinking.

Abstract

This paper provides a model to analyze and identify a decision maker's (DM's) hypothetical reasoning. Using this model, I show that a DM's propensity to engage in hypothetical thinking is captured exactly by her ability to recognize implications (i.e., to identify that one hypothesis implies another) and that this later relation is encoded by a DM's observable behavior. Thus, this characterization both provides a concrete definition of (flawed) hypothetical reasoning and, importantly, yields a methodology to identify these judgments from standard economic data.