Expected Utility
The expected utility theory deals with the analysis of choices among risky projects with (possibly multidimensional) outcomes.
The expected utility model was first proposed by Nicholas Bernoulli in 1713 and solved by Daniel Bernoulli in 1738 as the St. Petersburg paradox. Bernoulli argued that the paradox could be resolved if decisionmakers displayed risk aversion and argued for a logarithmic cardinal utility function.
The first important use of the expected utility theory was that of John von Neumann and Oskar Morgenstern who used the assumption of expected utility maximization in their formulation of game theory.
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Famous quotes containing the words expected and/or utility:
“For I had expected always
Some brightness to hold in trust,
Some final innocence
To save from dust;”
—Stephen Spender (1909–1995)
“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)