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When faced with several alternatives, the person will choose the alternative with the highest utility. The utility function is not visible; however, by observing the choices made by the person, we can "reverse-engineer" his utility function. This is the goal of revealed preference theory. [citation needed] In practice, however, people are not ...
Standard utility functions represent ordinal preferences. The expected utility hypothesis imposes limitations on the utility function and makes utility cardinal (though still not comparable across individuals). Although the expected utility hypothesis is standard in economic modeling, it is violated in psychological experiments.
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]
In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. In a normative context, utility refers to a goal or objective that we wish to maximize, i.e., an objective function.
A single-attribute utility function maps the amount of money a person has (or gains), to a number representing the subjective satisfaction he derives from it. The motivation to define a utility function comes from the St. Petersburg paradox: the observation that people are not willing to pay much for a lottery, even if its expected monetary gain is infinite.
The Becker–DeGroot–Marschak method (BDM), named after Gordon M. Becker, Morris H. DeGroot and Jacob Marschak for the 1964 Behavioral Science paper, "Measuring Utility by a Single-Response Sequential Method" is an incentive-compatible procedure used in experimental economics to measure willingness to pay (WTP).
In economics, Epstein–Zin preferences refers to a specification of recursive utility. A recursive utility function can be constructed from two components,: a time aggregator that characterizes preferences in the absence of uncertainty and a risk aggregator that defines the certainty equivalent function that characterizes preferences over static gambles and is used to aggregate the risk ...
A consumer's indirect utility (,) can be computed from their utility function (), defined over vectors of quantities of consumable goods, by first computing the most preferred affordable bundle, represented by the vector (,) by solving the utility maximization problem, and second, computing the utility ((,)) the consumer derives from that ...