Skip to main content Accessibility help
×
  • Ivan Moscati, Università degli Studi dell'Insubria, Italy and Baffi Carefin, Università Bocconi, Milan
Publisher:
Cambridge University Press
Online publication date:
July 2023
Print publication year:
2023
Online ISBN:
9781009198295

Book description

This Element offers an accessible but technically detailed review of expected utility theory (EU), which is a model of individual decision-making under uncertainty that is central for both economics and philosophy. The Element's approach falls between the history of ideas and economic methodology. At the historical level, it reviews EU by following its conceptual evolution from its original formulation in the eighteenth century through its transformations and extensions in the mid-twentieth century to its more recent supersession by post-EU theories such as prospect theory. In reconstructing the history of EU, it focuses on the methodological issues that have accompanied its evolution, such as whether the utility function and the other components of EU correspond to actual mental entities. On many of these issues, no consensus has yet been reached, and in this Element the author offers his view on them.

References

Abdellaoui, M., Klibanoff, P., and Placido, L.. 2015. “Ambiguity and Compound Risk Attitudes: An Experiment.Management Science 61: 13061322.
Abdellaoui, M., Li, C., Wakker, P. P., and Wu, G.. 2020. “A Defense of Prospect Theory in Bernheim & Sprenger’s Experiment.” Unpublished working paper. https://personal.eur.nl/wakker/pdf/wak.bernh.r.sp.pdf.
Allais, M. 1953. “Le comportement de l’homme rationnel devant le risque.Econometrica 21: 503546.
Andersen, S., Harrison, G., Lau, M., and Rutström, E.. 2008. “Lost in State Space: Are Preferences Stable?International Economic Review 49: 10911112.
Anscombe, F. and Aumann, R.. 1963. “A Definition of Subjective Probability.Annals of Mathematical Statistics 34: 199205.
Aumann, R. 1962. “Utility Theory without the Completeness Axiom.Econometrica 30: 445462.
Aumann, R. [1971] 2000. “Letter from Robert Aumann to Leonard Savage and Letter from Leonard Savage to Robert Aumann.” In Aumann, R., Collected Papers, Vol. 2, 305310.
Baccelli, J. 2017. “Do Bets Reveal Beliefs?Synthese 194: 33933419.
Baccelli, J. 2021. “The Problem of State-Dependent Utility: A Reappraisal.British Journal for the Philosophy of Science 72: 617634.
Baccelli, J. and Mongin, P.. 2022. “Can Redescriptions of Outcomes Salvage the Axioms of Decision Theory?Philosophical Studies 179: 16211648.
Barseghyan, L., Prince, J., and Teitelbaum, J. C.. 2011. “Are Risk Preferences Stable across Contexts? Evidence from Insurance Data.American Economic Review 101: 591631.
Beauchamp, J. P., Benjamin, D. J., Laibson, D. I., and Chabris, C. F.. 2020. “Measuring and Controlling for the Compromise Effect When Estimating Risk Preference Parameters.Experimental Economics 23: 10691099.
Berg, N. and Gigerenzer, G.. 2010. “As-If Behavioral Economics: Neoclassical Economics in Disguise?History of Economic Ideas 18: 133165.
Bernheim, B. D., Royer, R., and Sprenger, C.. 2022. “Robustness of Rank Independence in Risky Choice.American Economic Review, Papers and Proceedings 112: 415420.
Bernheim, B. D. and Sprenger, C.. 2020. “On the Empirical Validity of Cumulative Prospect Theory.Econometrica 88: 13631409.
Bernoulli, D. [1738] 1954. “Exposition of a New Theory on the Measurement of Risk.” Econometrica 22: 2336.
Bernoulli, D. [1738] 1982. Specimen theoriae novae de mensura sortis. In Speiser, D., ed., Die Werke von Daniel Bernoulli, Vol. 2, 223234. Basel: Birkhäuser.
Bernoulli, J. [1713] 2006. The Art of Conjecturing. Baltimore, MD: Johns Hopkins University Press.
Bernoulli, N. [1709] 1975. De usu artis conjectandi in iure. In van der Waerden, B. L., ed., Die Werke von Jakob Bernoulli, Vol. 3, 287326. Basel: Birkhäuser.
Binmore, K. 2009. Rational Decisions. Princeton, NJ: Princeton University Press.
Bordalo, P., Gennaioli, N., and Shleifer, A.. 2022. “Salience.Annual Review of Economics 14, 521544.
Bradley, R. 2017. Decision Theory with a Human Face. Cambridge: Cambridge University Press.
Brandstätter, E., Gigerenzer, G., and Hertwig, R.. 2006. “The Priority Heuristic.Psychological Review 113: 409432.
Broome, J. 1990. “Bolker–Jeffrey Expected Utility Theory and Axiomatic Utilitarianism.Review of Economic Studies 57: 477502.
Buchak, L. 2013. Risk and Rationality. Oxford: Oxford University Press.
Cairnes, J. E. 1872. “New Theories in Political Economy.” Fortnightly Review 9: 7176.
Camerer, C. F. and Loewenstein, G.. 2004. “Behavioral Economics.” In C. F. Camerer, Loewenstein, G., and Rabin, M., eds., Advances in Behavioral Economics, 351. Princeton, NJ: Princeton University Press.
Chateauneuf, A. 1985. “On the Existence of a Probability Measure Compatible with a Total Preorder on a Boolean Algebra.Journal of Mathematical Economics 14: 4352.
Davidson, D., McKinsey, J. C. C., and Suppes, P.. 1955. “Outlines of a Formal Theory of Value, I.Philosophy of Science 22: 140160.
de Finetti, B. [1937] 1980. “Foresight: Its Logical Flaws, Its Subjective Sources.” In Kyburg, H. E. and Smokler, H. E., eds., Studies in Subjective Probability, 93158. New York: Wiley.
Einav, L., Finkelstein, A., Pascu, I., and Cullen, M. R.. 2012. “How General Are Risk Preferences?American Economic Review 102: 26062638.
Ellsberg, D. 1961. “Risk, Ambiguity, and the Savage Axioms.Quarterly Journal of Economics 75: 643669.
Fishburn, P. C. 1978. “On Handa’s ‘New Theory of Cardinal Utility’ and the Maximization of Expected Return.Journal of Political Economy 86: 321324.
Friedman, M. 1953. “The Methodology of Positive Economics.” In M. Friedman, Essays in Positive Economics, 343. Chicago, IL: University of Chicago Press.
Friedman, M. and Savage, L. J.. 1948. “The Utility Analysis of Choices Involving Risk.Journal of Political Economy 56: 279304.
Friedman, M. and Savage, L. J.. 1952. “The Expected-Utility Hypothesis and the Measurability of Utility.Journal of Political Economy 60: 463474.
Gilboa, I. 2009. Theory of Decision under Uncertainty. Cambridge: Cambridge University Press.
Gilboa, I. and Marinacci, M.. 2013. “Ambiguity and the Bayesian Paradigm.” In Acemoglu, D., Arellano, M., and Dekel, E., eds., Advances in Economics and Econometrics, Vol. 1, 179242. New York: Cambridge University Press.
Gilboa, I., Postlewaite, A., and Schmeidler, D.. 2008. “Probability and Uncertainty in Economic Modeling.Journal of Economic Perspectives 22: 173188.
Gilboa, I., Postlewaite, A., and Schmeidler, D.. 2012. “Rationality of Belief or: Why Savage’s Axioms Are Neither Necessary Nor Sufficient for Rationality.Synthese 187: 1131.
Gilboa, I., Postlewaite, A., and Schmeidler, D.. 2021. “The Complexity of the Consumer Problem.Research in Economics 75: 96103.
Gustafsson, J. E. 2022. Money-Pump Arguments. Cambridge: Cambridge University Press.
Hacking, I. 1975. The Emergence of Probability. Cambridge: Cambridge University Press.
Handa, J. 1977. “Risk, Probabilities, and a New Theory of Cardinal Utility.Journal of Political Economy 85: 97122.
Harrison, G. W., Martínez-Correa, J., and Swarthout, J. T.. 2015. “Reduction of Compound Lotteries with Objective Probabilities.Journal of Economic Behavior & Organization 119: 3255.
Herne, K. 1999. “The Effects of Decoy Gambles on Individual Choice.Experimental Economics 2: 3140.
Hicks, J. R. 1931. “The Theory of Uncertainty and Profit.Economica 32: 170189.
Hicks, J. R. 1934. “The Application of Mathematical Methods to the Theory of Risk.Econometrica 2: 194195.
Hicks, J. R. 1939. Value and Capital. Oxford: Clarendon Press.
Huber, J., Payne, J. W., and Puto, C.. 1982. “Adding Asymmetrically Dominated Alternatives.Journal of Consumer Research 9: 9098.
Huygens, C. [1657] 1920. De ratiociniis in ludo aleae. In Œuvres complètes de Christiaan Huygens, vol. 14, 50175. La Haye: Nijhoff.
Jeffrey, R. C. [1965] 1990. The Logic of Decision. Chicago, IL: University of Chicago Press.
Jevons, W. S. 1871. The Theory of Political Economy. London: Macmillan.
Kahneman, D. and Tversky, A.. 1979. “Prospect Theory: An Analysis of Decision under Risk.Econometrica 47: 263292.
Karni, E. 1996. “Probabilities and Beliefs.Journal of Risk and Uncertainty 13: 249262.
Karni, E. 2008. “State-Dependent Utility.” In Anand, P., Pattanaik, P., and Puppe, C., eds., The Handbook of Rational and Social Choice, 223238. Oxford: Oxford University Press.
Keynes, J. M. 1921. A Treatise on Probability. London: Macmillan.
Knight, F. H. 1921. Risk, Uncertainty, and Profit. Boston, MA: Houghton Mifflin.
Kolmogorov, A. 1933. Grundbegriffe der Wahrscheinlichkeitsrechnung. Berlin: Springer.
Koopman, B. O. 1940. “The Axioms and Algebra of Intuitive Probability.Annals of Mathematics 41: 269–262.
Kraft, H. C., Pratt, W. J., and Seidenberg, A.. 1959. “Intuitive Probability on Finite Sets.Annals of Mathematical Statistics 30: 408419.
Kreps, D. 1988. Notes on the Theory of Choice. Boulder, CO: Westview Press.
Laplace, P.-S. 1812. Théorie analytique des probabilités. Paris: Courcier.
Leonard, R. 1995. “From Parlor Games to Social Science.Journal of Economic Literature 33: 730761.
Lewis, D. 1974. “Radical Interpretation.Synthese 23: 331344.
Lewis, D. [1980] 1987. “A Subjectivist’s Guide to Objective Chance.” In D. Lewis, Philosophical Papers, Vol. 2, 83113. New York: Oxford University Press.
Lichtenstein, S. and Slovic, P.. 1971. “Reversals of Preference between Bids and Choices in Gambling Decisions.Journal of Experimental Psychology 89: 4655.
Lichtenstein, S. and Slovic, P., eds. 2006. The Construction of Preference. New York: Cambridge University Press.
Lipman, B. L. and Pesendorfer, W.. 2013. “Temptation.” In Acemoglu, D., Arellano, M., and Dekel, E., eds., Advances in Economics and Econometrics, 243288. New York: Cambridge University Press.
Luce, R. D. and Raiffa, H.. 1957. Games and Decisions. New York: Wiley.
Marschak, J. 1950. “Rational Behavior, Uncertain Prospects, and Measurable Utility.Econometrica 18: 111141.
Marshall, A. 1890. Principles of Economics. London: Macmillan.
Mas-Colell, A., Whinston, M. D., and Green, J. R.. 1995. Microeconomic Theory. New York: Oxford University Press.
Mata, R. and Nagel, F.. 2023. “On an Unknown Early Version of Daniel Bernoulli’s Specimen theoriae novae de mensura sortis.” Unpublished working paper. https://doi.org/10.31234/osf.io/49f6s.
Menger, C. [1871] 1981. Principles of Economics. New York: New York University Press.
Montesano, A. 1985. “The Ordinal Utility under Uncertainty and the Measure of Risk Aversion in Terms of Preferences.Theory and Decision 18: 7385.
Moscati, I. 2007. “History of Consumer Demand Theory 1871–1971.European Journal of the History of Economic Thought 14: 119156.
Moscati, I. 2013. “How Cardinal Utility Entered Economic Analysis: 1909–1944.European Journal of the History of Economic Thought 20: 906939.
Moscati, I. 2016. “How Economists Came to Accept Expected Utility Theory: The Case of Samuelson and Savage.Journal of Economic Perspectives 30: 219236.
Moscati, I. 2018. Measuring Utility: From the Marginal Revolution to Behavioral Economics. New York: Oxford University Press.
Moscati, I. In press “Behavioural and Heuristic Models Are As-If Models Too – And That’s Ok.” Economics and Philosophy. http://doi:10.1017/S0266267123000093.
Mosteller, F. and Nogee, P.. 1951. “An Experimental Measurement of Utility.Journal of Political Economy 59: 371404.
Nuerk, H.-C., Moeller, K., and Willmes, K.. 2015. “Multi-Digit Number Processing.” In Kadosh, R. C. and Dowker, A., eds., The Oxford Handbook of Numerical Cognition, 106139. Oxford: Oxford University Press.
O’Donoghue, T. and Somerville, J.. 2018. “Modeling Risk Aversion in Economics.Journal of Economic Perspectives 32: 91114.
Okasha, S. 2016. “On the Interpretation of Decision Theory.Economics and Philosophy 32: 409433.
Pareto, V. 1896. Cours d’économie politique, Vol. 1. Lausanne: Rouge.
Pareto, V. [1906/9] 2014. Manual of Political Economy, ed. by Montesano, A., Zanni, A., Bruni, L., Chipman, J. S., and McLure, M.. New York: Oxford University Press.
Peterson, M. 2004. “From Outcomes to Acts: A Non-Standard Axiomatization of the Expected Utility Principle.Journal of Philosophical Logic 33: 361378.
Peterson, M. 2017. An Introduction to Decision Theory. New York: Cambridge University Press.
Prelec, D. 1998. “The Probability Weighting Function.Econometrica 66: 497527.
Quiggin, J. 1982. “A Theory of Anticipated Utility.Journal of Economic Behavior and Organization 3: 323343.
Rabin, M. 1998. “Psychology and Economics.Journal of Economic Literature 36: 1146.
Ramsey, F. P. [1926] 1931. “Truth and Probability.” In Braithwaite, R. B., ed., Foundations of Mathematics and Other Logical Essays, 156198. London: Kegan Paul.
Rubinstein, A. 1988. “Similarity and Decision-Making under Risk.Journal of Economic Theory 46: 145153.
Samuelson, P. A. 1947. Foundations of Economic Analysis. Cambridge, MA: Harvard University Press.
Samuelson, P. A. 1950. “Probability and the Attempts to Measure Utility.Economic Review 1: 167173.
Samuelson, P. A. 1952. “Probability, Utility, and the Independence Axiom.Econometrica 20: 670678.
Savage, L. J. [1954] 1972. The Foundations of Statistics. New York: Dover.
Schmoller, G. 1883. “Zur Methodologie der Staats und Sozialwissenschaften.Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im deutschen Reich 8: 974994.
Schoemaker, P. J. H. 1982. “The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations.Journal of Economic Literature 20: 529563.
Segal, U. 1992. “The Independence Axiom versus the Reduction Axiom.” In Edwards, W., ed., Utility Theories: Measurements and Applications, 165183. Boston, MA: Kluwer.
Shafer, G. 1981. “Constructive Probability.Synthese 48: 160.
Simonson, I. 1989. “Choice Based on Reasons: The Case of Attraction and Compromise Effects.Journal of Consumer Research 16: 158174.
Spiess, O. 1975. “Zur Vorgeschichte des Petersburger Problems.” In van der Waerden, B. L., ed., Die Werke von Jakob Bernoulli, Vol. 3, 557567. Basel: Birkhäuser.
Starmer, C. 2000. “Developments in Non-expected Utility Theory.Journal of Economic Literature 38: 332382.
Steele, K. and Orri Stefánsson, H.. 2020. “Decision Theory.” In Zalta, E. N., ed., Stanford Encyclopedia of Philosophy (Winter 2020 ed.). https://plato.stanford.edu/archives/win2020/entries/decision-theory/.
Thaler, R. 1980. “Toward a Positive Theory of Consumer Choice.Journal of Economic Behavior & Organization 1: 3960.
Thaler, R. 2016. “Behavioral Economics.American Economic Review 106: 15771600.
Tversky, A. 1969. “Intransitivity of Preferences.Psychological Review 76: 3148.
Tversky, A. and Kahneman, D.. 1992. “Advances in Prospect Theory: Cumulative Representation of Uncertainty.Journal of Risk and Uncertainty 5: 297323.
von Neumann, J. and Morgenstern, O.. [1944] 1953. Theory of Games and Economic Behavior. Princeton, NJ: Princeton University Press.
Wakker, P. P. 2010. Prospect Theory. Cambridge: Cambridge University Press.
Wakker, P. P. and Tversky, A.. 1993. “An Axiomatization of Cumulative Prospect Theory.Journal of Risk and Uncertainty 7: 147175.
Walras, L. [1874] 1954. Elements of Pure Economics. London: Allen and Unwin.
Zeisberger, S., Vrecko, D., and Langer, T.. 2012. “Measuring the Time Stability of Prospect Theory Preferences.Theory and Decision 72: 359386.
Zynda, L. 2000. “Representation Theorems and Realism about Degrees of Belief.Philosophy of Science 67: 4569.

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Book summary page views

Total views: 0 *
Loading metrics...

* Views captured on Cambridge Core between #date#. This data will be updated every 24 hours.

Usage data cannot currently be displayed.

Accessibility standard: Unknown

Accessibility compliance for the PDF of this book is currently unknown and may be updated in the future.