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:
“For me chemistry represented an indefinite cloud of future potentialities which enveloped my life to come in black volutes torn by fiery flashes, like those which had hidden Mount Sinai. Like Moses, from that cloud I expected my law, the principle of order in me, around me, and in the world.... I would watch the buds swell in spring, the mica glint in the granite, my own hands, and I would say to myself: “I will understand this, too, I will understand everything.””
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