In economics, game theory, and decision theory the expected utility hypothesis is a theory of utility in which "betting preferences" of people with regard to uncertain outcomes (gambles) are represented by a function of the payouts (whether in money or other goods), the probabilities of occurrence, risk aversion, and the different utility of the same payout to people with different assets or personal preferences. This theory 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 theory 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.
Read more about Expected Utility Hypothesis: Expected Value and Choice Under Risk, Bernoulli's Formulation, Infinite Expected Value — St. Petersburg Paradox, Criticism
Famous quotes containing the words expected, utility and/or hypothesis:
“One thing is certain the only thing that makes you younger or older is that nothing can happen that is different from what you expected and when that happens and it mostly does happen everything is different from what you expected then there is no difference between
being younger or older.”
—Gertrude Stein (1874–1946)
“Moral sensibilities are nowadays at such cross-purposes that to one man a morality is proved by its utility, while to another its utility refutes it.”
—Friedrich Nietzsche (1844–1900)
“On pragmatistic principles, if the hypothesis of God works satisfactorily in the widest sense of the word, it is true.”
—William James (1842–1910)