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Expected utility theory

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In this chapter for the forthcoming Handbook of Rational and Social Choice (Paul Anand, Prasanta Pattanaik, and Clemens Puppe, eds., Oxford University Press, 2008), we review classic normative expected utility theory. Our goal is to frame the subsequent chapters (which consider more modern extensions to and deviations from this classic theory) in a way that is accessible to the non-specialist but also useful to the specialist. We start from scratch with a revealed preference approach to the existence of a utility function. We then present the mathematical structure of additive and linear utility representations and their axiomatizations in the context of abstract choice theory and using intertemporal choice as a source of examples. We are thus able to focus on this mathematical structure without the interference of the specific interpretation and notation for decision under uncertainty. Furthermore, this approach allows us to focus on the interpretation of the axioms when we turn to decision under uncertainty.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2007/2007-71.pdf

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Copyright INSEAD. All rights reserved