In simplistic form, Expected Utility Theory (EUT) is a mathematical decision making process. Conventionally defined, it is a process where “a decision maker (DM) chooses between risky or uncertain prospects by comparing their expected utility values, i.e., the weighted sums obtained by adding the utility values of outcomes multiplied by their respective probabilities” (Mongin,2007, p.1). Simply put, a decision maker correlates the relative of risk or probability versus reward or potential outcome across multiple scenarios. The result, called the expected utility (U), is always represented as relative numerical score which can be used by managers use the resulting in a rational decision making process. Most often, scores are compared under the theory of maximization, with the highest relative U being the most correct decision (Lengwiler, 2008).
A Theory with Simple Beginnings and Complicated Implementation
Expected Utility Theory has roots deeply seated in history. Taking notes from as early as the 17th century, the first known person to have written about the value of utility was Pascal, who defined and quantified U while making his argument about the rationality of the existence of God in what has become known as Pascal’s wager (Lengwiler, 2008). Over the following centuries many theorists including Allais, Camerer, Dupuit, Gossen, Bernoilli, and von Neumamm have adapted, revised, or refined the basic principles set out by Pascal (Lengwiler, 2008; Mongin, 1997). Controversy regarding the classical interpretation of EUT falls into two general categories: differences in opinion of the proper mathematical equation to relate probability or risk to reward or the validity of the model based on the possibility of inadequate or non...
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...ry, properly select amongst the various mathematical models, and ensure that all data and assumptions are consistent with the selected model. In the face of basic decisions, leaders can quickly and easily apply the conventional interpretation provided they both make logical assumptions and properly predict the related probabilities or levels or risk.
Works Cited
Blavatskyy, P. R. (2007). Stochastic expected utility theory. Journal of Risk and Uncertainty, 34(3), 259. doi:http://dx.doi.org/10.1007/s11166-007-9009-6
Lengwiler, Y. (2008). The origins of expected utility theory. Retrieved from http://wwz.unibas.ch/fileadmin/wwz/redaktion/finance/personen/yvan/papers/lengwiler-09.pdf
Mongin, P. (1997). Expected utility theory. Retrieved from https://studies2.hec.fr/jahia/webdav/site/hec/shared/sites/mongin/acces_anonyme/page%20internet/O12.MonginExpectedHbk97.pdf
Epstein, Richard A. The Theory of Gambling and Statistical Logic. New York: Academic, 1977. Print.
a key factor within our responsibilities. We must learn how to apply different theories to certain
A number of classic criticisms still surround utilitarianism today, the first one concerning the calculating or quantifying of happiness, or pleasure as termed by Mill. Opponents of utilitarianism argue that the differences between people as individuals and number of uncontrollable variables in a given moral situation do not allow us to calculate the amount of happiness or pleasure that could be attained by a particular course of action. Additionally, the ability to discern consequences and the time needed to discern these consequences make the utilitarian approach to happiness impractical. In rebuttal, Mill argues that the aforementioned problems are present in any ethical theory. Only roughly estimating the consequences in a situation is necessary, according to Mill. Also, he makes claim that we do calculate the consequences of the various outcomes possible in a particular moral dilemma, whether or not we are cognoscente of doing so. In fact, in some situations, no time is in fact needed in order to act in accordance with traditional moral principles (such as love thy neighbor as thyself, do not steal/lie/murder/cheat, etc.).
The Rational expectations model was developed by Robert Lucas,rational economic agents are assumed to make the best of all possible use of all publicly available information. Before reaching a conclusion, people are assumed to consider all available information before them, then make informed, rational judgments on what the future holds. This does not mean that every individual’s expectations or predictions about the future will be correct. Those errors that do occur will be randomly distributed, such that the expectations of large numbers of people will average out to be correct.
Given the principles and explanation that John Stuart Mill gives in Utilitarianism, and given the assumptions and arguments of Harris’s “Survival Lottery,” Mill would not accept the implementation of the “Survival Lottery”. In this paper I will describe Mill’s utilitarian principles, provide a detailed summary of the “Survival Lottery”, and finally I will prove why Mill would not accept Harris’s lottery.
Abbate, Cheryl. "Utilitarianism." Philosophy 2310. Marquette University. David A Straz Jr. Hall , Milwaukee, Wi. 03 March 2014. Class lecture/PowerPoint
The ethical theory of utilitarianism has one basis, one must chose the action that will contribute to the greatest good; the greatest good for the greatest number. In any instance one may ask, which action will make the most people happy and how long? As a method
Mark Overvold (1980) argues that preferentist theories of value have trouble accommodating the view that agents can deliberately choose to perform actions that can be described as self-sacrifice. This essay will examine Overvold's article, and explain the problems that preferentism has with the idea of self-sacrifice.
As with the emerging theory of capitalism in the 18th and 19th Century England, we could speak of “pleasure” as “pluses” and “pains” as “minuses.” Thus the utilitarian would calculate which actions bring about more pluses over minuses.
Harsanyi, John C. "Cardinal welfare, individualistic ethics, and interpersonal comparisons of utility." Essays on Ethics, Social Behavior, and Scientific Explanation. Springer Netherlands, 1976. 6-23.
Companies. Retrieved July 4, 2008, from University of Phoenix, MMPBL-501 Web site. University of Phoenix . ( 2008). Economics for Managerial Decision Making
Rational choice theory, developed by Ronald Clarke and Derek Cornish in 1985, is a revival of Cesare Becca...
... that “they must have been served to hold without exception – if not universally.” The rule of preciseness requires that the models make as specific predicts as possible so that future observations can disprove or falsify the model.
This approach to decision-making may be easy for some people and difficult for others. For example, a Christian might use their faith in God and his teachings when reasoning. Expected Utility Theory has been used to explain the process of decision-making. This is the idea that people simply observe the decision, identity the value of each decision and choose the option that will result in the maximum level of the desired outcome. A common explanation for why people sometimes find this approach difficult can be explained by the prospect theory (Kahneman and Tversky). This can be summarised as the belief that people naturally tend to evaluate the psychological aspects of a decision rather than make a quick decision on what is wholly rational. For example, gambling. If someone was offered a role of a dice for anything under a 5 to gain £100, but would lose £50 if it was a 5 or above, people are more likely to turn down the offer as there is a reasonable risk that they may lose their money. This is known as loss aversion. Generally, I don’t think advanced training in areas such as statistics, economics and psychology would help people to make decisions that are more economically rewarding as I believe that autonomy is innate in human beings, therefore, I think people would decide what they truly wish to. However, I do think that people may use this advanced training, when they are
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.