Choice Under Uncertainty
In the expected utility theory of von Neumann and Morgenstern, four axioms together imply that individuals act in situations of risk as if they maximize the expected value of a utility function. One of the axioms is a version of the IIA axiom:
- If, then for any and ,
where p is a probability and means that M is preferred over L. This axiom says that if one outcome (or lottery ticket) L is considered to be not as good as another (M), then having a chance with probability p of receiving L rather than N is considered to be not as good as having a chance with probability p of receiving M rather than N.
Read more about this topic: Local Independence Of Irrelevant Alternatives
Famous quotes containing the words choice and/or uncertainty:
“And yet ‘twould seem that what is sung
In happy sadness by the young,
Fate has no choice but to fulfill.”
—Robert Frost (1874–1963)
“What a chimera then is man. What a novelty! What a monster, what a chaos, what a contradiction, what a prodigy. Judge of all things, imbecile worm of the earth; depositary of truth, a sink of uncertainty and error: the pride and refuse of the universe.”
—Blaise Pascal (1623–1662)