Expected Utility Hypothesis

An Expected Utility Hypothesis is a hypothesis concerning people's preferences with regard to choices that have uncertain outcomes.

• See: Economics, Game Theory, Decision Theory, Expected Value, Von Neumann–Morgenstern Utility Theorem.

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References

2014

• (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/Expected_utility_hypothesis Retrieved:2014-9-6.
  • In economics, game theory, and decision theory the expected utility hypothesis refers to a hypothesis concerning people's preferences with regard to choices that have uncertain outcomes (gambles). This hypothesis states that if certain axioms are satisfied, the subjective value associated with a gamble by an individual is the statistical expectation of that individual's valuations of the outcomes of that gamble. This hypothesis has proved useful to explain some popular choices that seem to contradict the expected value criterion (which takes into account only the sizes of the payouts and the probabilities of occurrence), such as occur in the contexts of gambling and insurance. Daniel Bernoulli initiated this hypothesis in 1738. Until the mid twentieth century, the standard term for the expected utility was the moral expectation, contrasted with "mathematical expectation" for the expected value. The von Neumann–Morgenstern utility theorem provides necessary and sufficient "rationality" axioms under which the expected utility hypothesis holds.

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