Higher-Order Decision Theory

Classical decision theory models behaviour in terms of utility maximisation where utilities represent rational preference relations over outcomes. However, empirical evidence and theoretical considerations suggest that we need to go beyond this framework. We propose to represent goals by higherorder functions or operators that take other functions as arguments where the max and argmax operators are special cases. Our higher-order functions take a context function as their argument where a context represents a process from actions to outcomes. By that we can define goals being dependent on the actions and the process in addition to outcomes only. This formulation generalises outcome based preferences to context-dependent goals. We show how to uniformly represent within our higher-order framework classical utility maximisation but also various other extensions that have been debated in economics. JEL codes: B4, C02, D01, D03