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 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)
“It is a good morning exercise for a research scientist to discard a pet hypothesis every day before breakfast. It keeps him young.”
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