expected utility hypothesis

This is the expected utility hypothesis.

The expected utility hypothesis posits that a utility function exists whose expected net change is a good criterion for real people's behavior.

The Ellsberg paradox is a paradox in decision theory and experimental economics in which people's choices violate the expected utility hypothesis.

As such, claims that the expected utility hypothesis does not characterize rationality must reject one of the VNM axioms.

The expected utility hypothesis, as applied to economics, has limited predictive accuracy, simply because in practice, humans do not always behave VNM-rationally.

The von Neumann-Morgenstern utility theorem provides necessary and sufficient "rationality" axioms under which the expected utility hypothesis holds.

This is a central theme of the expected utility hypothesis in which an individual chooses not the highest expected value, but rather the highest expected utility.

His name is particularly associated with what is commonly known as the Allais paradox, a decision problem he first presented in 1953 which contradicts the expected utility hypothesis.

Expected utility hypothesis cannot explain the shift in risk preferences across the day if bettors integrate their wealth because the last race of the day is not fundamentally different than the first.

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.

The aim of the expected utility theorem is to provide "modest conditions" (i.e. axioms) describing when the expected utility hypothesis holds, which can be evaluated directly and intuitively:

The expected utility hypothesis is that rationality can be modeled as maximizing an expected value, which given the theorem, can be summarized as "rationality is VNM-rationality".

Using the expected utility hypothesis will lead one to believe that one should expect the most utility (or money) from taking only box B. However if one uses the Dominance (game theory) principle, one would expect to benefit most from taking both boxes.

Observed and repeatable anomalies eventually challenged those hypotheses, and further steps were taken by the Nobel prizewinner Maurice Allais, for example in setting out the Allais paradox, a decision problem he first presented in 1953 which contradicts the expected utility hypothesis.

The role of quantum structures in economics was investigated, and more specifically a quantum model was worked out for the situation of the Ellsberg paradox in economics accounting for the deviations from classical probability due to ambiguity aversion, and it was analyzed how this quantum model generalizes the classical expected utility hypothesis.