The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Expected Utility Hypothesis

  • Mark J. Machina
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_127

Abstract

The expected utility hypothesis – that is, the hypothesis that individuals evaluate uncertain prospects according to their expected level of ‘satisfaction’ or ‘utility’ – is the predominant descriptive and normative model of choice under uncertainty in economics. It provides the analytical underpinnings for the economic theory of risk-bearing, including its applications to insurance and financial decisions, and has been formally axiomatized under conditions of both objective (probabilistic) and subjective (event-based) uncertainty. In spite of evidence that individuals may systematically depart from its predictions, and the development of alternative models, expected utility remains the leading model of economic choice under uncertainty.

Keywords

Arrow–Pratt index of absolute risk aversion Bernoulli, D. Bernoulli, N. Cobb–Douglas functions Comparative likelihood Consumer theory Cramer, G. Environmental economics Expected utility hypothesis First-order stochastic dominance preference Increasing risk Independence axiom Inequality (measurement) International trade Lotteries Malinvaud, E. Marschak, J. Menger, K. Objective vs. subjective uncertainty Ordinal revolution Preference functions Preference orderings Probability Risk Risk aversion St Petersburg paradox Stochastic dominance Subjective probability Sure-thing principle Transitivity Uncertainty von Neumann–Morgenstern utility function 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Mark J. Machina
    • 1
  1. 1.