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Such utility functions are also called von Neumann–Morgenstern (vNM). This is a central theme of the expected utility hypothesis in which an individual chooses not the highest expected value but rather the highest expected utility. The expected utility-maximizing individual makes decisions rationally based on the theory's axioms.
In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.
In decision theory, subjective expected utility is the attractiveness of an economic opportunity as perceived by a decision-maker in the presence of risk.Characterizing the behavior of decision-makers as using subjective expected utility was promoted and axiomatized by L. J. Savage in 1954 [1] [2] following previous work by Ramsey and von Neumann. [3]
The mythological Judgement of Paris required selecting from three incomparable alternatives (the goddesses shown).. Decision theory or the theory of rational choice is a branch of probability, economics, and analytic philosophy that uses the tools of expected utility and probability to model how individuals would behave rationally under uncertainty.
To describe how an individual would take decisions in a world where uncertainty aversion exists, modifications of the expected utility framework have been proposed. These include: Choquet expected utility : Created by French mathematician Gustave Choquet was a subadditive integral used as a way of measuring expected utility in situations with ...
Under the expected utility framework, this can only be realised through high levels of risk aversion. Households place a greater weight on the probability that a claim will be made when choosing a policy, thus it is suggested that the reference point of the household significantly influences the decisions when it comes to premiums and deductibles.
Generalized expected utility is a decision-making metric based on any of a variety of theories that attempt to resolve some discrepancies between expected utility theory and empirical observations, concerning choice under risky (probabilistic) or uncertain circumstances.
A Choquet integral is a subadditive or superadditive integral created by the French mathematician Gustave Choquet in 1953. [1] It was initially used in statistical mechanics and potential theory, [2] but found its way into decision theory in the 1980s, [3] where it is used as a way of measuring the expected utility of an uncertain event.