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The theory of subjective expected utility combines two concepts: first, a personal utility function, and second, a personal probability distribution (usually based on Bayesian probability theory). This theoretical model has been known for its clear and elegant structure and is considered by some researchers to be "the most brilliant axiomatic ...
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.
The rank-dependent expected utility model (originally called anticipated utility) is a generalized expected utility model of choice under uncertainty, designed to explain the behaviour observed in the Allais paradox, as well as for the observation that many people both purchase lottery tickets (implying risk-loving preferences) and insure against losses (implying risk aversion).
In this case, the expected utility of Lottery A is 14.4 (= .90(16) + .10(12)) and the expected utility of Lottery B is 14 (= .50(16) + .50(12)) [clarification needed], so the person would prefer Lottery A. Expected utility theory implies that the same utilities could be used to predict the person's behavior in all possible lotteries. If, for ...
In decision theory, subjective expected utility is the attractiveness of an economic opportunity as perceived by a decision-maker in the presence of risk.Characterizing the behavior of decision-makers as using subjective expected utility was promoted and axiomatized by L. J. Savage in 1954 [1] [2] following previous work by Ramsey and von Neumann. [3]
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.
A Choquet integral is a subadditive or superadditive integral created by the French mathematician Gustave Choquet in 1953. [1] It was initially used in statistical mechanics and potential theory, [2] but found its way into decision theory in the 1980s, [3] where it is used as a way of measuring the expected utility of an uncertain event.
Merton's portfolio problem is a problem in continuous-time finance and in particular intertemporal portfolio choice.An investor must choose how much to consume and must allocate their wealth between stocks and a risk-free asset so as to maximize expected utility.