Difference between revisions of "Expected utility"

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{{wikilink|Expected utility hypothesis}}
 
{{wikilink|Expected utility hypothesis}}
'''Expected utility''' is the [[expected value]] of a [[utility function]].
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{{arbitallink|https://arbital.com/p/expected_utility/|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.  
  
Von Neumann and Morgenstern proved the [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]. They also proved the [http://web.archive.org/web/20070221104329/http://www.econ.hku.hk/~wsuen/uncertainty/eu.pdf expected utility theorem], which states a rational agent ought to have preferences that maximize his total utility. Humans often deviate from rationality due to inconsistent preferences or the existence of [http://wiki.lesswrong.com/wiki/Bias cognitive biases].
  
Humans, of course, are a different story.
 
  
 
==Blog posts==
 
==Blog posts==
 
=====By Stuart Armstrong:=====
 
 
*[http://lesswrong.com/lw/1cv/extreme_risks_when_not_to_use_expected_utility/ Extreme risks: when not to use expected utility]
 
*[http://lesswrong.com/lw/1cv/extreme_risks_when_not_to_use_expected_utility/ Extreme risks: when not to use expected utility]
 
*[http://lesswrong.com/lw/1d5/expected_utility_without_the_independence_axiom/ Expected utility without the independence axiom]
 
*[http://lesswrong.com/lw/1d5/expected_utility_without_the_independence_axiom/ Expected utility without the independence axiom]
 
*[http://lesswrong.com/lw/1dr/money_pumping_the_axiomatic_approach/ Money pumping: the axiomatic approach]
 
*[http://lesswrong.com/lw/1dr/money_pumping_the_axiomatic_approach/ Money pumping: the axiomatic approach]
 
*[http://lesswrong.com/lw/1ga/in_conclusion_in_the_land_beyond_money_pumps_lie/ In conclusion: in the land beyond money pumps lie extreme events]
 
*[http://lesswrong.com/lw/1ga/in_conclusion_in_the_land_beyond_money_pumps_lie/ In conclusion: in the land beyond money pumps lie extreme events]
 
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*[http://lesswrong.com/lw/244/vnm_expected_utility_theory_uses_abuses_and/ VNM expected utility theory: uses, abuses, and interpretation]
 
==See also==
 
==See also==
  

Latest revision as of 05:40, 28 August 2016

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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. They also proved the expected utility theorem, which states a rational agent ought to have preferences that maximize his total utility. Humans often deviate from rationality due to inconsistent preferences or the existence of cognitive biases.


Blog posts

See also