The appropriateness of the expected utility model

Encyclopedia of Medical Decision Making, 2009

.In this paper, we present a brief version of de Finetti-Ramsey’s subjective probability theory and provide a rigorous yet intuitively plausible explanation of expected utility using elementary mathematics. In a final section, we take up the case of some “Paradoxes in Expected Utility Theory” and try to reconcile them with the help of subjective probabilities.

Decision-making Process, 2009

Ce chapitre d'ouvrage collectif a pour but de présenter les bases de la modélisation de la prise de décision dans un univers risqué. Nous commençons par dé…nir, de manière générale, la notion de risque et d'accroissement du risque et rappelons des dé…nitions et catégorisations (valables en dehors de tout modèle de représentation) de comportements face au risque. Nous exposons ensuite le modèle classique d'espérance d'utilité de von Neumann et Morgenstern et ses principales propriétés. Les problèmes posés par ce modèle sont ensuite discutés et deux modèles généralisant l'espérance d'utilité brièvement présentés. Mots clé: risque, aversion pour le risque, espérance d'utilité, von Neumann et Morgenstern, Paradoxe d'Allais. JEL: D81

Canadian Journal of Philosophy, 2015

There are decision problems where the preferences that seem rational to many people cannot be accommodated within orthodox decision theory in the natural way. In response, a number of alternatives to the orthodoxy have been proposed. In this paper, I offer an argument against those alternatives and in favour of the orthodoxy. I focus on preferences that seem to encode sensitivity to risk. And I focus on the alternative to the orthodoxy proposed by Lara Buchak’s risk-weighted expected utility theory. I will show that the orthodoxy can be made to accommodate all of the preferences that Buchak’s theory can accommodate.

Oxford University Press eBooks, 2011

People violate expected utility theory and this has been traditionally modeled by augmenting its weight-and-add framework by nonlinear transformations of values and probabilities. Yet individuals often use one-reason decision-making when making court decisions or choosing cellular phones, and institutions do the same when creating rules for traffic safety or fair play in sports. We analyze a model of one-reason decision-making, the priority heuristic, and show that it simultaneously implies common consequence effects, common ratio effects, reflection effects, and the fourfold pattern of risk attitude. The preferences represented by the priority heuristic satisfy some standard axioms. This work may provide the basis for a new look at bounded rationality. Most descriptive theories of decision-making-and certainly those that are variants of expected value theory (EVT) or expected utility theory (EUT)-make the following psychological assumptions: 1. Independent evaluations: Every option has a value that is measured by a single number (options are not evaluated relative to other options). 2. Exhaustive search: The value of an option is calculated by using all available information (for gambles, the probabilities and values for all possible outcomes). 3. Trade-offs: To calculate an option's value, low values on one attribute (e.g., a value) can be compensated by high values on another attribute (e.g., a probability). EVT makes two additional assumptions for calculating an option's value: 4. Objective probabilities: The probabilities used to calculate an option's value are equal to the objective probabilities (the objective probabilities are not transformed in a nonlinear way).

Expected Utility theory (EU) has long been the dominant theory in the field of decision making under risk and uncertainty. Yet there has also been a continuous flow of experimental evidence incompatible with EU, resulting in well-known paradoxes and effects, such as the Allais paradox, the Ellsberg paradox, the common ratio effect, framing effects, and preference reversals. Although EU theory may still carry the day as a normative theory, there is a growing need for new theories relaxing EU to satisfy the detected phenomena. One of the most popular branches in the non-EU theories is rank-dependent expected utility theory (RDEU). Although it has gained great popularity among economists, it is an inspiring model for psychologists too.

2000

Expected utility theory does not directly deal with the utility of chance. It has been suggested in the literature ) that this can be remedied by an approach which explicitly models the emotional consequences which give rise to the utility of chance. We refer to this as the elaborated outcomes approach. It is argued that the elaborated outcomes approach destroys the possibility of deriving a representation theorem based on the usual axioms of expected utility theory. This is shown with the help of an example due to Markowitz. It turns out that the space of conceivable lotteries over elaborated outcomes is too narrow to permit the application of the axioms. Moreover it is shown that a representation theorem does not hold for the example.

Management …, 2007

T his paper explores inconsistencies that occur in utility measurement under risk when expected utility theory is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect (riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation for the latter observation may be that there was less distortion in probability weighting in the interval 0 10 0 20 than has commonly been observed.

2003

Abstract Intelligent agents often need to assess user utility functions in order to make decisions on their behalf, or predict their behavior. When uncertainty exists over the precise nature of this utility function, one can model this uncertainty using a distribution over utility functions. This view lies at the core of games with incomplete information and, more recently, several proposals for incremental preference elicitation.

2019

The present contribution examines the emergence of expected utility theory by John von Neumann and Oskar Morgenstern, the subjective the expected utility theory by Savage, and the problem of choice under risk and uncertainty, focusing in particular on the seminal work “The Utility Analysis of Choices involving Risk" (1948) by Milton Friedman and Leonard Savage to show how the evolution of the theory of choice has determined a separation of economics from psychology.