Decisions with Errors

This paper presents a new theory of decision making with errors. The proposed theory explains all major violations of expected utility theory such as the preference reversal phenomenon (including the strong reversals and the preference reversals with the probability equivalents), the common consequence effect (the Allais paradox), the common ratio effect, the violations of the betweenness axiom and the fourfold pattern of risk attitudes. The theory also explains many well-known deviations from the Nash equilibrium such as the positive offers in the dictator game and in the ultimatum game, stopping at the intermediate nodes of the centipede game and “own-payoff” effects in the matching pennies game. JEL Codes: D81, C72, C91, C92