Expected utility theory

Betting Tversky and Fox1 said that there is a pattern that violates the expected utility theory as follows 112 Stanford students were asked to choose between prospects defined by the outcome of an upcoming football game between Stanford and the University of California at Berkeley. Each participant was presented with three pairs of prospects displayed in Table 6.2. The percentage of respondents who chose each prospect appears on the right-hand side. ... 

Table 6.2 shows that, overall, f, was chosen over g, f2 over g2, and g3 over f3. Furthermore, the triple (I), f2, g3) was the single most common pattern, selected by 36% of the respondents. This pattern violates expected utility theory, which implies that a person who chooses I) over g and f2 over g2 should also choose f3 over g3. However, 64% of the... 

TABLE 2 Basic Axioms of Subjective Expected Utility Theory... 

As we have seen, the human capital approach to valuing life is clearly inadequate, but just how inadequate Economic theorists took up this question during the 1970s and 1980s, devising theoretical models based on the premises of expected utility theory. Their hope was that, by making a few plausible assumptions concerning the way individuals... 

Ultimately, Jones-Lee s exercise attempts to estimate one diflScult-to-measure value, v, from putatively easier-to-measure data, risk aversion and Ap. But risk aversion and, above all, Ap remain elusive his Rosetta stone, it turns out, is yet another hieroglyph. The attempt to characterize individuals hypothetical willingness to pay for changes in risk confronts a quandary either it makes assumptions concerning life and death that stretch expected utility theory beyond the bounds of reason, or it simply cannot generate meaningful results. And so the trail leads once again to direct quantification. 

An example can be seen in expected utility theory, which states that people are rational decision makers that will weigh up the utilities of outcomes through probability, and seek to maximise expected utility from their actions (Baron 2008 Hardman 2009). This goes some way to explain why people will still take risks on site - if it will get the job done faster, the balance of safety versus productivity comes into play. However experimental research has disproved this basic assumption within certain contexts - people do not make rational decisions, and consequently further explanations have been developed, such as the Allais paradox, which states... 

ABSTRACT The expected utility theory is currently the normative theory underlying the rational choice under risk. In this paper, we challenge the expected utihty theory and question its status as a normative theory for rational decision making when a limited number of risk-reward opportunities are involved. We show that the maximum expected utility principle in cases of a limited number of risk-reward bets is fundamentally flawed. It hides the net loss associated with risky prospects and can be very detrimental for decision making in various sectors of the economy. 

While a theoretical link between expected utility theory and FN-criteria might be hard, if not impossible, to establish (Bedford 2005 longejan 2008), FN-criteria have proven themselves in the Dutch major hazards policy as practical tools for the evaluation of the probabilities of large-scale accidents. The FN-criteria used in the Dutch major hazards policy have a quadratic steepness, meaning that the exceedance... 

Fishbum PC (1966) Stationary value mechanisms and expected utility theory. J Math Psychol 3(2) 434 57. ISSN 0022-2496 http //dx.doi.org/10.1016/0022-2496(66)90023-X... 

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