3�$-�8�&� �Eĝ � �d)9�Z4��) �@�@ ����i��%ɖ�m�t5�7�Ͱk�ա_:Ps��^GS@�� 7 /;�9�e���ғu�? But questions arise when we try to articulate what this kind of modeling amounts to. When one modifies the experiments to mi tends to support traditional theory. 0000003163 00000 n Economists often invoke expected-utility theory to explain substantial (observed or posited) risk aversion over stakes where the theory actually predicts virtual risk neutrality. 0000002482 00000 n pÑv�õpá�������hΡ����V�wh� h��� E�^�z��8�rn+�>���m�>�^��#���r�^n/���^�_�^N�s���r��Ћ#\����rLL���&�I\�R��&�4N8��/��� _%c� NON-EXPECTED UTILITY THEORY Mark J. Machina To appear in The New Palgrave Dictionary of Economics, 2nd Edition edited by Steven N. Durlauf and Lawrence E. Blume, Macmillan (Basingstoke and New York), forthcoming Abstract: Beginning with the … 3. vNM expected utility theory a) Intuition [L4] b) Axiomatic foundations [DD3] 4. Markowitz (1952) also pointed out possible contradictions to the expected utility theory as early as 1952. This will give you the expected utility of the action. _g���L7Y�G��{ǘ���b޾>��v�#��F>��͟/�/C������1��n�� �ta��q��OY�__�5���UUe�KZ\��U����q��2�~��?�&�Y�mn�� ��J?�����߱�ê4����������y/*E�u���e�!�~�ǬҺVU��Y���Tq���Z�y?�6u��=�g�D Nx>m�p� ((J,��8�p �F�hڿ����� @Ш��)�0 ���� hޜT{0�W?߾����R��]eTh<6�Z��A��Ȧ�c)EE��H����� The theory recommends which option a rational individual should choose in a complex situation, based on his tolerance for risk and personal preferences.. Subjective expected utility theory (Savage, 1954): under assumptions roughly similar to ones form this lecture, preferences have an expected utility representation where both the utilities endstream endobj 1117 0 obj <> endobj 1118 0 obj <> endobj 1119 0 obj [1/hyphen 2/space 3/space] endobj 1120 0 obj <> endobj 1121 0 obj <>stream ����CwXO�f��>{w��iV�H�ͫsi�c�q7Ң�ڀ��N�NM�iiȰ�o���}�b�����!�o?~��GX�eNa�b,t�*d9�n{2V��}=�|+�Q�}|q9��YىRb�)�{F�λ��Vӓ���'l�\w6�>��/G�_����\�5?$������|�Ḧ́� L�T�7��#WP��ԩ��_�xKܐi.�'�OtN�����$@������]�{Sny�� ��C�9��+�m�zD�R�yt��}��BX*����[>�����׌��6F=�Q;S�*j��{�����w��&^I���b@R���ճҵ��w:�:��i���G����˾B�uï���%�Kj'P���O���ڴ%5e�����6u�ﵯ�Kn�;�zH�̟?����g�ǻT�J�.�y�G����{�҅� So far, probabilities are objective. G. Parmigiani, in International Encyclopedia of the Social & Behavioral Sciences, 2001. EU DP i n = i i … Outline 1. 0000474094 00000 n Expected utility, in decision theory, the expected value of an action to an agent, calculated by multiplying the value to the agent of each possible outcome of the action by the probability of that outcome occurring and then summing those numbers.The concept of expected utility is used to elucidate decisions made under conditions of risk. xڵzy|Sם�9�.ҕe[�%y��Œ�&Y�%Y^eY^06x����b��1J�B�C � �Rq�� 0000003035 00000 n ��!�^W7SNY��Rm�x� � �|�d�A%������b�U�t� 55 0 obj << /Linearized 1 /O 57 /H [ 1014 355 ] /L 117387 /E 55875 /N 11 /T 116169 >> endobj xref 55 29 0000000016 00000 n 0000000927 00000 n 0000001369 00000 n 0000001576 00000 n 0000001692 00000 n 0000001922 00000 n 0000002681 00000 n 0000002914 00000 n 0000003397 00000 n 0000003418 00000 n 0000003980 00000 n 0000004001 00000 n 0000004709 00000 n 0000004730 00000 n 0000005566 00000 n 0000005587 00000 n 0000006433 00000 n 0000006454 00000 n 0000007336 00000 n 0000007357 00000 n 0000008188 00000 n 0000008209 00000 n 0000009071 00000 n 0000009092 00000 n 0000009733 00000 n 0000034215 00000 n 0000055585 00000 n 0000001014 00000 n 0000001348 00000 n trailer << /Size 84 /Info 54 0 R /Root 56 0 R /Prev 116159 /ID[] >> startxref 0 %%EOF 56 0 obj << /Type /Catalog /Pages 42 0 R /JT 53 0 R /PageLabels 40 0 R >> endobj 82 0 obj << /S 206 /L 297 /Filter /FlateDecode /Length 83 0 R >> stream trailer Finally, we show that for lotteries characterized by substantial stakes non-expected utility theories ﬁt the data equally well as expected utility theory. ��WlZ��D�ʒ�-4*����s �����b,�3ⳳ#���1K���~ ��z8^���JP���m���.����ʕ� �egٳ�^��*]���F,�� Ȏ��6~b�M@���L3/�f�����_ѻ�zͣ9tEG�!t@�h?��C{���Dh��Q4��P#2J%�̫L#�c�_�o�Rj����u���)Y$#o��� endstream endobj 1091 0 obj <>/Metadata 730 0 R/Names 1093 0 R/OCProperties<>/OCGs[1094 0 R]>>/PageMode/UseNone/Pages 720 0 R/StructTreeRoot 732 0 R/Type/Catalog>> endobj 1092 0 obj <>/Font<>>>/Fields[]>> endobj 1093 0 obj <> endobj 1094 0 obj <>>>>> endobj 1095 0 obj <>/Font<>/ProcSet[/PDF/Text]/XObject<>>>/Rotate 0/StructParents 0/Tabs/S/Trans<>/Type/Page>> endobj 1096 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[230.633 0.996 238.603 10.461]/Subtype/Link/Type/Annot>> endobj 1097 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[236.611 0.996 246.573 10.461]/Subtype/Link/Type/Annot>> endobj 1098 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[244.581 0.996 252.551 10.461]/Subtype/Link/Type/Annot>> endobj 1099 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[252.322 0.996 259.296 10.461]/Subtype/Link/Type/Annot>> endobj 1100 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[257.303 0.996 264.277 10.461]/Subtype/Link/Type/Annot>> endobj 1101 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[262.285 0.996 269.259 10.461]/Subtype/Link/Type/Annot>> endobj 1102 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[267.266 0.996 274.24 10.461]/Subtype/Link/Type/Annot>> endobj 1103 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[274.011 0.996 280.985 10.461]/Subtype/Link/Type/Annot>> endobj 1104 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[278.992 0.996 285.966 10.461]/Subtype/Link/Type/Annot>> endobj 1105 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[283.974 0.996 290.948 10.461]/Subtype/Link/Type/Annot>> endobj 1106 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[288.955 0.996 295.929 10.461]/Subtype/Link/Type/Annot>> endobj 1107 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[295.7 0.996 302.674 10.461]/Subtype/Link/Type/Annot>> endobj 1108 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[300.682 0.996 307.655 10.461]/Subtype/Link/Type/Annot>> endobj 1109 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[305.663 0.996 312.637 10.461]/Subtype/Link/Type/Annot>> endobj 1110 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[310.644 0.996 317.618 10.461]/Subtype/Link/Type/Annot>> endobj 1111 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[317.389 0.996 328.348 10.461]/Subtype/Link/Type/Annot>> endobj 1112 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[326.356 0.996 339.307 10.461]/Subtype/Link/Type/Annot>> endobj 1113 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[339.078 0.996 348.045 10.461]/Subtype/Link/Type/Annot>> endobj 1114 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[346.052 0.996 354.022 10.461]/Subtype/Link/Type/Annot>> endobj 1115 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[352.03 0.996 360.996 10.461]/Subtype/Link/Type/Annot>> endobj 1116 0 obj <>stream The concept of expected utility is best illustrated byexample. ���%pB�T���K��9M�����YZ���yp���dB�{�8��g Prudence coefficient and precautionary savings [DD5] 7. I would rather not tote the umbrella on a sunnyday, but I would rather face rain with the umbrella than withoutit. 0000004711 00000 n This can be expressed mathematically with Equation 9.1. %PDF-1.6 %���� EXPECTED UNCERTAIN UTILITY THEORY 3 For any fg ∈F and A⊂Ω,letfAgdenote the act that agrees with f on Aand with gon the Ac, the complement of A; that is, fAgis the unique act hsuch that A⊂{h=f} and Ac ⊂{h=g}. It exhibits a tremendous flexibility in representing aspects of attitudes toward risk, has a well-developed ana- Expected utility theory is used as a tool for analyzing situations where individuals must make a decision without knowing which outcomes may … London, Edward Elgar, 1997, p. 342-350). Which of these acts should I choose? R � L�\{�>00�s�e�Y��2��a���˩o�8��w)�3�2M��:���@� �� �[. DEFINITION:AneventE is ideal if [fEh gEhand hEf hEg] implies 0000002674 00000 n 0000020769 00000 n xref 0000006397 00000 n 0000005945 00000 n There are two acts available to me: taking my umbrella, andleaving it at home. The experimental evidence against expected utility theo or unconvincing. Expected Utility Theory or Risk-Weighted Expected Utility Theory, have been used to model the considerations that govern rational behavior. That is, … Subjective Expected Utility Theory. 0000004558 00000 n endstream endobj 83 0 obj 242 endobj 57 0 obj << /Type /Page /Parent 41 0 R /Resources 58 0 R /Contents [ 64 0 R 66 0 R 68 0 R 70 0 R 72 0 R 74 0 R 76 0 R 78 0 R ] /MediaBox [ 0 0 595 842 ] /CropBox [ 0 0 595 842 ] /Rotate 0 >> endobj 58 0 obj << /ProcSet [ /PDF /Text ] /Font << /TT5 60 0 R /TT6 62 0 R >> /ExtGState << /GS1 81 0 R >> >> endobj 59 0 obj << /Type /FontDescriptor /Ascent 822 /CapHeight 692 /Descent -277 /Flags 34 /FontBBox [ -166 -283 1021 927 ] /FontName /OEEALE+Palatino-Roman /ItalicAngle 0 /StemV 84 /XHeight 469 /FontFile2 79 0 R >> endobj 60 0 obj << /Type /Font /Subtype /TrueType /FirstChar 32 /LastChar 233 /Widths [ 250 278 0 0 0 0 0 208 333 333 0 606 250 333 250 606 500 500 500 500 500 500 500 500 500 500 250 250 0 606 0 444 0 778 611 709 774 611 556 763 832 337 333 726 611 946 831 786 604 786 668 525 613 778 722 1000 667 667 0 0 0 0 0 0 0 500 553 444 611 479 333 556 582 291 234 556 291 883 582 546 601 560 395 424 326 603 565 834 516 556 500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 278 500 500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 479 479 ] /Encoding /WinAnsiEncoding /BaseFont /OEEALE+Palatino-Roman /FontDescriptor 59 0 R >> endobj 61 0 obj << /Type /FontDescriptor /Ascent 822 /CapHeight 692 /Descent -277 /Flags 98 /FontBBox [ -170 -276 1010 918 ] /FontName /OEEBFM+Palatino-Italic /ItalicAngle -15 /StemV 84 /XHeight 482 /FontFile2 80 0 R >> endobj 62 0 obj << /Type /Font /Subtype /TrueType /FirstChar 32 /LastChar 122 /Widths [ 250 0 0 0 0 0 0 0 333 333 0 0 250 333 250 0 500 500 500 500 500 500 0 500 0 500 0 0 0 0 0 0 0 722 0 667 778 611 556 722 778 333 333 0 556 944 0 0 611 0 667 556 611 778 0 944 0 0 0 0 0 0 0 0 0 444 463 407 500 389 278 500 500 278 0 444 278 778 556 444 500 0 389 389 333 556 500 722 500 500 444 ] /Encoding /WinAnsiEncoding /BaseFont /OEEBFM+Palatino-Italic /FontDescriptor 61 0 R >> endobj 63 0 obj 484 endobj 64 0 obj << /Filter /FlateDecode /Length 63 0 R >> stream Rabin (2000) calibration theorem, for expected utility to provide a uniﬁed account of individuals’ attitude towards risk. Economics 326: Expected Utility and the Economics of Uncertainty Ethan Kaplan October 3, 2012. The expected utility hypothesis is a popular concept in economics, game theory and decision theory that serves as a reference guide for judging decisions involving uncertainty. In the second chapter, Expected Utility Theory is thoroughly analysed basing on the original publication of von Neumann and Morgenstern (Von Neumann and Morgenstern, 1953). 0000003942 00000 n 0000000016 00000 n Remarkably, they viewed the development of the expected utility model 6.In the case of $$\rho =\infty$$, restricting our attention to the set of measurable pure alternatives, Sect. ˘ ˇ ˆ ˙ ˝˛ 2 ˚=˙ ˚ C F J 455 ˚ Created Date: 10/8/2001 12:06:06 PM 1135 0 obj <>stream 0000004404 00000 n 0000020717 00000 n 0000006538 00000 n In reality, uncertainty is usually subjective. 7 shows that our theory exhibits a form of the classical EU theory. �Զ����s8J�gX����l� �Z��'@rpV"��Ȉ�p �(v���Y{�5��R��Q����G���m�o�ƍѽ���W����ϞF����^FOž��^Kg�v�#S��n���!^�ڡ��f4_�ӏ�mu�sRy�t�?���x�3��ST�ϓ���R��BY��S!F6��q��R�A*SY!_���#I4l��ufPڮ��'y�Y5���O�~��f�DL��e�-Fޮv���$M� ���Y�%:c�7�H/W�^�~�����@پ�W�Y��O)2�~���)~ٍ�NЦ;�T9��q"h���qO'�t�f� ��rg�c��z� =����E!zK�{D�R̺���@��� R�u4i�oYEj��" ���\!�N��E�ۤ Ӌ4kx��(���Q���5�\�&F�hO�d����($�āo ��8mG$���˝/�4eYC�Y]����M"MUR 7�YSe**�_�P+��Y �2g�J���?��N�jZ�~/��x�~�)\���j�g�/��'��H�8���G�d1��^*"��F�=���-���}E�H�,z��0 � 0000475673 00000 n 0000009177 00000 n endstream endobj 1122 0 obj <>stream • Expected utility allows people to compare gambles • Given two gambles, we assume people prefer the situation that generates the greatest expected utility – People maximize expected utility 18 Example • Job A: certain income of$50K • Job B: 50% chance of $10K and 50% chance of$90K • Expected income is the same ($50K) but in one case, the expected utility theory that predicts an equal increase, of 0.01U(w) in both cases, U being the utility function. 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## expected utility theory, pdf

��t�9}�W�4�� ��C݂7V����յ��(!����Cu*>.a!N#��TH #��guCPeH$F����׺Y�PO�G�ĉJKn����}�Ml�k�[�F�M�7������+#��V�+>>�Z��|��+5����H�D�z�6���?_ ����������N�i�$w��ɰ�|�i0u0pCy�9q�譐���M ��[�=D����a���J�����C�����LO�q�"9?��Qyx��~L������TDɔaE�����H�>3�$-�8�&� �Eĝ � �d)9�Z4��) �@�@ ����i��%ɖ�m�t5�7�Ͱk�ա_:Ps��^GS@�� 7 /;�9�e���ғu�? But questions arise when we try to articulate what this kind of modeling amounts to. When one modifies the experiments to mi tends to support traditional theory. 0000003163 00000 n Economists often invoke expected-utility theory to explain substantial (observed or posited) risk aversion over stakes where the theory actually predicts virtual risk neutrality. 0000002482 00000 n pÑv�õpá�������hΡ����V�wh� h��� E�^�z��8�rn+�>���m�>�^��#���r�^n/���^�_�^N�s���r��Ћ#\����rLL���&�I\�R��&�4N8��/��� _%c� NON-EXPECTED UTILITY THEORY Mark J. Machina To appear in The New Palgrave Dictionary of Economics, 2nd Edition edited by Steven N. Durlauf and Lawrence E. Blume, Macmillan (Basingstoke and New York), forthcoming Abstract: Beginning with the … 3. vNM expected utility theory a) Intuition [L4] b) Axiomatic foundations [DD3] 4. Markowitz (1952) also pointed out possible contradictions to the expected utility theory as early as 1952. This will give you the expected utility of the action. _g���L7Y�G��{ǘ���b޾>��v�#��F>��͟/�/C������1��n�� �ta��q��OY�__�5���UUe�KZ\��U����q��2�~��?�&�Y�mn�� ��J?�����߱�ê4����������y/*E�u���e�!�~�ǬҺVU��Y���Tq���Z�y?�6u��=�g�D Nx>m�p� ((J,��8�p �F�hڿ����� @Ш��)�0 ���� hޜT{0�W?߾����R��]eTh<6�Z��A��Ȧ�c)EE��H����� The theory recommends which option a rational individual should choose in a complex situation, based on his tolerance for risk and personal preferences.. Subjective expected utility theory (Savage, 1954): under assumptions roughly similar to ones form this lecture, preferences have an expected utility representation where both the utilities endstream endobj 1117 0 obj <> endobj 1118 0 obj <> endobj 1119 0 obj [1/hyphen 2/space 3/space] endobj 1120 0 obj <> endobj 1121 0 obj <>stream ����CwXO�f��>{w��iV�H�ͫsi�c�q7Ң�ڀ��N�NM�iiȰ�o���}�b�����!�o?~��GX�eNa�b,t�*d9�n{2V��}=�|+�Q�}|q9��YىRb�)�{F�λ��Vӓ���'l�\w6�>��/G�_����\�5?$������|�Ḧ́� L�T�7��#WP��ԩ��_�xKܐi.�'�OtN�����$@������]�{Sny�� ��C�9��+�m�zD�R�yt��}��BX*����[>�����׌��6F=�Q;S�*j��{�����w��&^I���b@R���ճҵ��w:�:��i���G����˾B�uï���%�Kj'P���O���ڴ%5e�����6u�ﵯ�Kn�;�zH�̟?����g�ǻT�J�.�y�G����{�҅� So far, probabilities are objective. G. Parmigiani, in International Encyclopedia of the Social & Behavioral Sciences, 2001. EU DP i n = i i … Outline 1. 0000474094 00000 n Expected utility, in decision theory, the expected value of an action to an agent, calculated by multiplying the value to the agent of each possible outcome of the action by the probability of that outcome occurring and then summing those numbers.The concept of expected utility is used to elucidate decisions made under conditions of risk. xڵzy|Sם�9�.ҕe[�%y��Œ�&Y�%Y^eY^06x����b��1J�B�C � �Rq�� 0000003035 00000 n ��!�^W7SNY��Rm�x� � �|�d�A%������b�U�t� 55 0 obj << /Linearized 1 /O 57 /H [ 1014 355 ] /L 117387 /E 55875 /N 11 /T 116169 >> endobj xref 55 29 0000000016 00000 n 0000000927 00000 n 0000001369 00000 n 0000001576 00000 n 0000001692 00000 n 0000001922 00000 n 0000002681 00000 n 0000002914 00000 n 0000003397 00000 n 0000003418 00000 n 0000003980 00000 n 0000004001 00000 n 0000004709 00000 n 0000004730 00000 n 0000005566 00000 n 0000005587 00000 n 0000006433 00000 n 0000006454 00000 n 0000007336 00000 n 0000007357 00000 n 0000008188 00000 n 0000008209 00000 n 0000009071 00000 n 0000009092 00000 n 0000009733 00000 n 0000034215 00000 n 0000055585 00000 n 0000001014 00000 n 0000001348 00000 n trailer << /Size 84 /Info 54 0 R /Root 56 0 R /Prev 116159 /ID[] >> startxref 0 %%EOF 56 0 obj << /Type /Catalog /Pages 42 0 R /JT 53 0 R /PageLabels 40 0 R >> endobj 82 0 obj << /S 206 /L 297 /Filter /FlateDecode /Length 83 0 R >> stream trailer Finally, we show that for lotteries characterized by substantial stakes non-expected utility theories ﬁt the data equally well as expected utility theory. ��WlZ��D�ʒ�-4*����s �����b,�3ⳳ#���1K���~ ��z8^���JP���m���.����ʕ� �egٳ�^��*]���F,�� Ȏ��6~b�M@���L3/�f�����_ѻ�zͣ9tEG�!t@�h?��C{���Dh��Q4��P#2J%�̫L#�c�_�o�Rj����u���)Y$#o��� endstream endobj 1091 0 obj <>/Metadata 730 0 R/Names 1093 0 R/OCProperties<>/OCGs[1094 0 R]>>/PageMode/UseNone/Pages 720 0 R/StructTreeRoot 732 0 R/Type/Catalog>> endobj 1092 0 obj <>/Font<>>>/Fields[]>> endobj 1093 0 obj <> endobj 1094 0 obj <>>>>> endobj 1095 0 obj <>/Font<>/ProcSet[/PDF/Text]/XObject<>>>/Rotate 0/StructParents 0/Tabs/S/Trans<>/Type/Page>> endobj 1096 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[230.633 0.996 238.603 10.461]/Subtype/Link/Type/Annot>> endobj 1097 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[236.611 0.996 246.573 10.461]/Subtype/Link/Type/Annot>> endobj 1098 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[244.581 0.996 252.551 10.461]/Subtype/Link/Type/Annot>> endobj 1099 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[252.322 0.996 259.296 10.461]/Subtype/Link/Type/Annot>> endobj 1100 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[257.303 0.996 264.277 10.461]/Subtype/Link/Type/Annot>> endobj 1101 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[262.285 0.996 269.259 10.461]/Subtype/Link/Type/Annot>> endobj 1102 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[267.266 0.996 274.24 10.461]/Subtype/Link/Type/Annot>> endobj 1103 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[274.011 0.996 280.985 10.461]/Subtype/Link/Type/Annot>> endobj 1104 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[278.992 0.996 285.966 10.461]/Subtype/Link/Type/Annot>> endobj 1105 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[283.974 0.996 290.948 10.461]/Subtype/Link/Type/Annot>> endobj 1106 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[288.955 0.996 295.929 10.461]/Subtype/Link/Type/Annot>> endobj 1107 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[295.7 0.996 302.674 10.461]/Subtype/Link/Type/Annot>> endobj 1108 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[300.682 0.996 307.655 10.461]/Subtype/Link/Type/Annot>> endobj 1109 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[305.663 0.996 312.637 10.461]/Subtype/Link/Type/Annot>> endobj 1110 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[310.644 0.996 317.618 10.461]/Subtype/Link/Type/Annot>> endobj 1111 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[317.389 0.996 328.348 10.461]/Subtype/Link/Type/Annot>> endobj 1112 0 obj <>/Border[0 0 0]/C[0.5 0.5 0.5]/H/N/P 1095 0 R/Rect[326.356 0.996 339.307 10.461]/Subtype/Link/Type/Annot>> endobj 1113 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[339.078 0.996 348.045 10.461]/Subtype/Link/Type/Annot>> endobj 1114 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[346.052 0.996 354.022 10.461]/Subtype/Link/Type/Annot>> endobj 1115 0 obj <>/Border[0 0 0]/C[1 0 0]/H/N/P 1095 0 R/Rect[352.03 0.996 360.996 10.461]/Subtype/Link/Type/Annot>> endobj 1116 0 obj <>stream The concept of expected utility is best illustrated byexample. ���%pB�T���K��9M�����YZ���yp���dB�{�8��g Prudence coefficient and precautionary savings [DD5] 7. I would rather not tote the umbrella on a sunnyday, but I would rather face rain with the umbrella than withoutit. 0000004711 00000 n This can be expressed mathematically with Equation 9.1. %PDF-1.6 %���� EXPECTED UNCERTAIN UTILITY THEORY 3 For any fg ∈F and A⊂Ω,letfAgdenote the act that agrees with f on Aand with gon the Ac, the complement of A; that is, fAgis the unique act hsuch that A⊂{h=f} and Ac ⊂{h=g}. It exhibits a tremendous flexibility in representing aspects of attitudes toward risk, has a well-developed ana- Expected utility theory is used as a tool for analyzing situations where individuals must make a decision without knowing which outcomes may … London, Edward Elgar, 1997, p. 342-350). Which of these acts should I choose? R � L�\{�>00�s�e�Y��2��a���˩o�8��w)�3�2M��:���@� �� �[. DEFINITION:AneventE is ideal if [fEh gEhand hEf hEg] implies 0000002674 00000 n 0000020769 00000 n xref 0000006397 00000 n 0000005945 00000 n There are two acts available to me: taking my umbrella, andleaving it at home. The experimental evidence against expected utility theo or unconvincing. Expected Utility Theory or Risk-Weighted Expected Utility Theory, have been used to model the considerations that govern rational behavior. That is, … Subjective Expected Utility Theory. 0000004558 00000 n endstream endobj 83 0 obj 242 endobj 57 0 obj << /Type /Page /Parent 41 0 R /Resources 58 0 R /Contents [ 64 0 R 66 0 R 68 0 R 70 0 R 72 0 R 74 0 R 76 0 R 78 0 R ] /MediaBox [ 0 0 595 842 ] /CropBox [ 0 0 595 842 ] /Rotate 0 >> endobj 58 0 obj << /ProcSet [ /PDF /Text ] /Font << /TT5 60 0 R /TT6 62 0 R >> /ExtGState << /GS1 81 0 R >> >> endobj 59 0 obj << /Type /FontDescriptor /Ascent 822 /CapHeight 692 /Descent -277 /Flags 34 /FontBBox [ -166 -283 1021 927 ] /FontName /OEEALE+Palatino-Roman /ItalicAngle 0 /StemV 84 /XHeight 469 /FontFile2 79 0 R >> endobj 60 0 obj << /Type /Font /Subtype /TrueType /FirstChar 32 /LastChar 233 /Widths [ 250 278 0 0 0 0 0 208 333 333 0 606 250 333 250 606 500 500 500 500 500 500 500 500 500 500 250 250 0 606 0 444 0 778 611 709 774 611 556 763 832 337 333 726 611 946 831 786 604 786 668 525 613 778 722 1000 667 667 0 0 0 0 0 0 0 500 553 444 611 479 333 556 582 291 234 556 291 883 582 546 601 560 395 424 326 603 565 834 516 556 500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 278 500 500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 479 479 ] /Encoding /WinAnsiEncoding /BaseFont /OEEALE+Palatino-Roman /FontDescriptor 59 0 R >> endobj 61 0 obj << /Type /FontDescriptor /Ascent 822 /CapHeight 692 /Descent -277 /Flags 98 /FontBBox [ -170 -276 1010 918 ] /FontName /OEEBFM+Palatino-Italic /ItalicAngle -15 /StemV 84 /XHeight 482 /FontFile2 80 0 R >> endobj 62 0 obj << /Type /Font /Subtype /TrueType /FirstChar 32 /LastChar 122 /Widths [ 250 0 0 0 0 0 0 0 333 333 0 0 250 333 250 0 500 500 500 500 500 500 0 500 0 500 0 0 0 0 0 0 0 722 0 667 778 611 556 722 778 333 333 0 556 944 0 0 611 0 667 556 611 778 0 944 0 0 0 0 0 0 0 0 0 444 463 407 500 389 278 500 500 278 0 444 278 778 556 444 500 0 389 389 333 556 500 722 500 500 444 ] /Encoding /WinAnsiEncoding /BaseFont /OEEBFM+Palatino-Italic /FontDescriptor 61 0 R >> endobj 63 0 obj 484 endobj 64 0 obj << /Filter /FlateDecode /Length 63 0 R >> stream Rabin (2000) calibration theorem, for expected utility to provide a uniﬁed account of individuals’ attitude towards risk. Economics 326: Expected Utility and the Economics of Uncertainty Ethan Kaplan October 3, 2012. The expected utility hypothesis is a popular concept in economics, game theory and decision theory that serves as a reference guide for judging decisions involving uncertainty. In the second chapter, Expected Utility Theory is thoroughly analysed basing on the original publication of von Neumann and Morgenstern (Von Neumann and Morgenstern, 1953). 0000003942 00000 n 0000000016 00000 n Remarkably, they viewed the development of the expected utility model 6.In the case of $$\rho =\infty$$, restricting our attention to the set of measurable pure alternatives, Sect. ˘ ˇ ˆ ˙ ˝˛ 2 ˚=˙ ˚ C F J 455 ˚ Created Date: 10/8/2001 12:06:06 PM 1135 0 obj <>stream 0000004404 00000 n 0000020717 00000 n 0000006538 00000 n In reality, uncertainty is usually subjective. 7 shows that our theory exhibits a form of the classical EU theory. �Զ����s8J�gX����l� �Z��'@rpV"��Ȉ�p �(v���Y{�5��R��Q����G���m�o�ƍѽ���W����ϞF����^FOž��^Kg�v�#S��n���!^�ڡ��f4_�ӏ�mu�sRy�t�?���x�3��ST�ϓ���R��BY��S!F6��q��R�A*SY!_���#I4l��ufPڮ��'y�Y5���O�~��f�DL��e�-Fޮv���$M� ���Y�%:c�7�H/W�^�~�����@پ�W�Y��O)2�~���)~ٍ�NЦ;�T9��q"h���qO'�t�f� ��rg�c��z� =����E!zK�{D�R̺���@��� R�u4i�oYEj��" ���\!�N��E�ۤ Ӌ4kx��(���Q���5�\�&F�hO�d����($�āo ��8mG$���˝/�4eYC�Y]����M"MUR 7�YSe**�_�P+��Y �2g�J���?��N�jZ�~/��x�~�)\���j�g�/��'��H�8���G�d1��^*"��F�=���-���}E�H�,z��0 � 0000475673 00000 n 0000009177 00000 n endstream endobj 1122 0 obj <>stream • Expected utility allows people to compare gambles • Given two gambles, we assume people prefer the situation that generates the greatest expected utility – People maximize expected utility 18 Example • Job A: certain income of$50K • Job B: 50% chance of $10K and 50% chance of$90K • Expected income is the same ($50K) but in one case, the expected utility theory that predicts an equal increase, of 0.01U(w) in both cases, U being the utility function. 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