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Nicolaus Bernoulli described the St. Petersburg paradox (involving infinite expected values) in 1713, prompting two Swiss mathematicians to develop expected utility theory as a solution. Bernoulli's paper was the first formalization of marginal utility, which has broad application in economics in addition to expected utility theory. He used ...
The classical resolution of the paradox involved the explicit introduction of a utility function, an expected utility hypothesis, and the presumption of diminishing marginal utility of money. According to Daniel Bernoulli: The determination of the value of an item must not be based on the price, but rather on the utility it yields ...
For instance, expected-utility theory was proposed in 1738 by Daniel Bernoulli [3] as a way of modeling behavior which is inconsistent with expected-value maximization. In 1956, John Kelly devised the Kelly criterion by optimizing the use of available information, and Leo Breiman later noted that this is equivalent to optimizing time-average ...
Bernoulli's imaginary logarithmic utility function and Gabriel Cramer's U = W 1/2 function were conceived at the time not for a theory of demand but to solve the St. Petersburg's game. Bernoulli assumed that "a poor man generally obtains more utility than a rich man from an equal gain" [ 3 ] an approach that is more profound than the simple ...
An optimal decision is a decision that leads to at least as good a known or expected outcome as all other available decision options. It is an important concept in decision theory . In order to compare the different decision outcomes, one commonly assigns a utility value to each of them.
In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.
Daniel was the son of Johann Bernoulli (one of the early developers of calculus) and a nephew of Jacob Bernoulli (an early researcher in probability theory and the discoverer of the mathematical constant e). [6] He had two brothers, Niklaus and Johann II. Daniel Bernoulli was described by W. W. Rouse Ball as "by far the ablest of the younger ...
Expected utility theory deals with the analysis of choices among risky projects with multiple (possibly multidimensional) outcomes. The St. Petersburg paradox was first proposed by Nicholas Bernoulli in 1713 and solved by Daniel Bernoulli in 1738, although the Swiss mathematician Gabriel Cramer proposed taking the expectation of a square-root ...