Difference between revisions of "Expected utility"

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'''Expected utility''' is the [[expected value]] in terms of the [[utility]] produced by an action. It is the sum of the utility of each of its possible consequences, individually weighted by their respective probability of occurrence.  
 
'''Expected utility''' is the [[expected value]] in terms of the [[utility]] produced by an action. It is the sum of the utility of each of its possible consequences, individually weighted by their respective probability of occurrence.  
  
Von Neumann and Morgenstern proved the [http://web.archive.org/web/20070221104329/http://www.econ.hku.hk/~wsuen/uncertainty/eu.pdf expected utility theorem], which says that when a rational agent chooses between different "gambles" (probability distributions over outcomes), the utility of such a gamble can always be seen as the expected utility of the gamble's outcome.
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A rational decision maker will, when presented with a choice, take the action with the greatest expected utility. Von Neumann and Morgenstern provided [http://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem#The_axioms| 4 basic axioms of rationality]. Under this axioms, they proved the [http://web.archive.org/web/20070221104329/http://www.econ.hku.hk/~wsuen/uncertainty/eu.pdf expected utility theorem], which says that there exists a utility function defined on possible outcomes and every decision maker's preferences are characterized by maximizing the expected value of the function. The [http://en.wikipedia.org/wiki/Expected_utility_hypothesis | expected utility hypothesis] holds that this axioms truly model the notion of a rational agent. Either way, humans often deviate from ratinality by committing [[bias]|cognitive biases].
  
Humans, of course, are a different story.
 
  
 
==Blog posts==
 
==Blog posts==

Revision as of 03:23, 10 September 2012

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Expected utility is the expected value in terms of the utility produced by an action. It is the sum of the utility of each of its possible consequences, individually weighted by their respective probability of occurrence.

A rational decision maker will, when presented with a choice, take the action with the greatest expected utility. Von Neumann and Morgenstern provided 4 basic axioms of rationality. Under this axioms, they proved the expected utility theorem, which says that there exists a utility function defined on possible outcomes and every decision maker's preferences are characterized by maximizing the expected value of the function. The | expected utility hypothesis holds that this axioms truly model the notion of a rational agent. Either way, humans often deviate from ratinality by committing [[bias]|cognitive biases].


Blog posts

See also