How do people choose between risky prospects? I discuss the model of random expected utility and its axiomatic characterization. Other models are discussed too, including models of nonexpected utility and models with additive shocks.

This chapter addresses the often-misunderstood concept of validity. Much of the methodological discussion around sociological experiments is framed in terms of internal and external validity. The standard view is that the more we ensure that the experimental treatment is isolated from potential confounds (internal validity), the more unlikely it is that the experimental results can be representative of phenomena of the outside world (external validity). However, other accounts describe internal validity as a prerequisite of external validity: Unless we ensure internal validity of an experiment, little can be said of the outside world. We contend in this chapter that problems of either external or internal validity do not necessarily depend on the artificiality of experimental settings or on the laboratory–field distinction between experimental designs. We discuss the internal–external distinction and propose instead a list of potential threats to the validity of experiments that includes "usual suspects" like selection, history, attrition, and experimenter demand effects and elaborate on how these threats can be productively handled in experimental work. Moreover, in light of the different types of experiments, we also discuss the strengths and weaknesses of each regarding threats to internal and external validity.

In Chapter 4, we examine the supply of dogs to the U.S. market. We first explain two potential sources of social inefficiency in the market: information asymmetry and negative externality. We then explore the heterogeneous nature of the sources of supply. Based on organizational form, we distinguish between commercial and so-called backyard breeders. Based on the ethics of practice, we distinguish between ethical breeders who provide high-quality care and unethical breeders who do not. We relate our six resulting categories of supply, including puppy mills and shelters, to the information asymmetry, negative externality, and a third potential market failure, the public good nature of the problem of protecting dogs from cruelty. Finally, we argue that serious market failures provide justification for government intervention to increase efficiency. However, the current patchwork of regulations and lack of resources invested in enforcement allow puppy mills and black-market breeders to impose costs on others and harm dogs.

This chapter explores an underappreciated component of the risk–return trade-off with incomplete information. A central determinant of a state’s willingness to make risky proposals is how much it must overpay weaker types to obtain stronger types’ compliance. When this "peace premium" is large, riskier proposals look more attractive. However, given the right type of uncertainty, increasing the costs of war or decreasing a state’s resolve can counterintuitively increase the probability of war. We also explore a new type of uncertainty: how much value the winner of the war will receive.

Chapter 3 turns to the determinants of the supply of goods and services and to the way in which the “forces” of demand and supply determine prices and the quantities exchanged. Via the use of simple models, economists explain generalizations concerning how the quantities of goods and services supplied respond to prices. The accounts of demand in chapter 2 and supply in this chapter take prices as given, and additional modeling is needed to explain how supply and demand are equilibrated and what properties market equilibria possess. This chapter pulls together the discussions of the first three chapters to offer a general sketch of the causal structure and basic principles of mainstream economics. It takes issue with the view, which used to be dominant, that general equilibrium theory is the fundamental theory of contemporary economics. What I call “equilibrium theory,” not general equilibrium theory, is fundamental.

Margaret Levi and Barry Weingast focus on a particular type of case in which the subject is an outcome that results from strategic interaction, when one person’s decision depends on what another does. “A weakness of case studies per se is that there typically exist multiple ways to interpret a given case,” they begin. “How are we to know which interpretation makes most sense? What gives us confidence in the particular interpretation offered?” An analytic narrative first elucidates the principal players, their preferences, key decision points and possible choices, and the rules of the game. It then builds a model of the sequence of interaction including predicted outcomes and evaluates the model through comparative statics and the testable implications the mode generates. Most analytic narratives model situations as extensive form games. However, although game theory is useful, there is no hard rule that requires us to formalize. In this kind of case study, the findings do not generalize to other contexts, but instead point to the characteristics of situations to which a similar strategic logic applies.