Subjective expected utility is a method in decision theory in the presence of risk, promoted by L. J. Savage in 1954 following previous work by Ramsey and von Neumann. The theory of subjective expected utility combines two subjective concepts: first, a personal utility function, and second a personal probability distribution (based on Bayesian probability theory).
Savage proved that, if you adhere to axioms of rationality, if you believe an uncertain event has possible outcomes each with a utility to you of then your choices can be explained as arising from a function in which you believe that there is a subjective probability of each outcome is, and your subjective expected utility is the expected value of the utility,
You may be able to make a decision which changes the possible outcomes to in which case your subjective expected utility will become
Which decision you prefer depends on which subjective expected utility is higher. Different people may make different decisions because they may have different utility functions or different beliefs about the probabilities of different outcomes.
Savage assumed that it is possible to take convex combinations of decisions and that preferences would be preserved. So if you prefer to and to then you will prefer to, for .
Experiments have shown that many individuals do not behave in a manner consistent with subjective expected utility, e.g. most prominently Allais (1953) and Ellsberg (1961) .
Famous quotes containing the words subjective, expected and/or utility:
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