Expected utility maximization

Our work so far assumes that both the supplier and the retailer in the supply chain adopt the satisficing objectives. However, there are other types of objectives formanagers and/orcompanies in business practice. These objectives include expected profit maximization (EPM), expected utility maximization, and expectedprofit maximization subjectto downside-risk constraint (Gan et al., 2005). If this is the case, how could we design Pareto-optimal and/or coordinating contracts for such a supply chain ... 

The final two expressions required to close the model are the first and second derivatives of the hedonic wage function. By rearranging the first-order condition for expected utility maximization (equation 2.2) we can show that... 

The theory of decision making under risk tells people to maximize expected utility. In cases like the one 1 have just discussed, this means the same as utility averaged over many periods. The theory has been extended, however, to cover choice situations that do not repeal themselves day after day or year after year. In that case the decision maker is asked to rely on his "subjective probabilities" or, in less solemn language, on his informed hunches. The utility of each possible outcome of an action is weighted by the estimated probability of that outcome, to yield the expected utility of the action. The theory tells us to take the action that has associated with it the highest expected utility. In the next chapter 1 state my reasons for being skeptical about this extension of the theory. 

The individual s problem is to maximize his expected utility in (1) subject to the budget constraint... 

As diseussed above, expected utility can be reconciled with the two-stage stochastic framework. For example, if one uses the nonlinear coordinate transformation of real value into utility value given by the utility function (Figure 12.3), one can modify the view of the risk curve, as shown in Figure 12.12. If such utility function can be constructed based more on quantitative relations to shareholder value, then one does not need to perform any risk management at all. One could speculate that it suffices to maximize utility value, but only if one has identified the ultimate objective function associated with the company s optimum financial path. It is worth noting that anything less, like the net present value, which can be considered a utility function too, will require the analysis of different curves before a final choice is made. 

The classical notion of risk in decision theory is primarily modeled using utility theory. Utility theory assumes that people are rational and should choose the option that maximizes the expected utility, which is the product of probability and payoff. Utility theory also assumes that all risk probabilities and payoff are known to a point estimate but does not allow ambiguity, or a variant form of uncertainty. In reality, however, uncertainty does occur when risk probabilities or payoff is missing or unknown. The subjective expected utility (SEU) model of utility theory proposed by Savage [26] argues that people s subjective preferences and beliefs, rather than objective probabilities, are used in the evaluation of an uncertain prospect for decision making. The SEU model is based on a set of seven axioms designed for consistent and rational behavior. 

The problem confronting a worker is to find the level of injury risk (n) that maximizes expected utility. Given our initial assumptions we can mathematically represent expected utility as... 

Workers. On the supply side of the labor market a person seeks the level of safety maximizing his or her expected utility. The selection process sorts people into the various submarkets in light of their het-... 

The model we used to study the interface between OSHA and WC differs from the model developed in Chapter 3 in two respects. First, to increase realism we assumed workers attempt to maximize lifetime expected utility and firms attempt to maximize the present value of long-run expected profits. Second, to study the impact of possible public policy changes we incorporated specific relationships representing OSHA activities and the WC insurance system. 

The problem facing the representative worker is finding the level of risk (n) that maximizes lifetime expected utility subject to it > 0. We represented a worker s expected utility using the strongly separable power utility function... 

The agent will take an action that will maximize his expected utility which is given by... 

Li and Lee [98] propose a model of market competition in which a customer values cost and quality as well as speed of delivery. In their model, there are two firms in the market providing substitutable goods or services in a make-to-order fashion. When demand arises, a customer chooses the firm that maximizes its expected utility of price, quality and response time. They study the relationships between price and processing speed (capacity) and show that the rapid response does give a competitor the advantage of price premium and market share. They assume that customers can observe the congestion levels of the firms, and their choices are dynamic. 

Rational behavior the analyst transforms the distribution of masses in a distribution of probabilities in order to maximize expected utility (i.e. pignistic transformation). 

Edge Spectroscopy (XANES) can be used to estimate the expected absorption energy of the anomalous atoms. Eor example, SGX has determined the energy that corresponds to the maximum absorption of X-rays by pure selenomethionine. This value is used for all experiments that utilize selenomethionine to determine the required phases. With this approach, the limited X-ray lifetime of protein crystals can be devoted to determination of diffraction. In addition to preserving crystals, this approach maximizes the time devoted to data-collection in high-throughput mode. 

---