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Why do people generalize EU instead of making an entirely new model, or create a model that is neither a special case nor an extension of EU?

To my knowledge, most utility functions under risk and uncertainty are generalization of expected utility (EU) or expected value (EV). Examples are regret theory, prospect theory, and all the models for Ellsberg paradox. The list goes on.

I am guessing the reasons:

  1. EU is historically the classic model so everyone follows it. But by doing research people should try to find the better model, not the model that is closely link to the classic model.

  2. EU performs pretty good experimentally and empirically. By totally abandoning EU some goodies might be missed. By relaxing EU those goodies can be kept.

  3. If a model is a generalization of EU, then the model can be empirically compared with EU easily with likelihood ratio tests. But even if a model is not a generalization of EU, statistical tests are also available.

  4. EU is well-studied and a lot of tools are ready. Relaxing EU is technically easier than creating an entirely new model.

But these still do not explain why no one (to my knowledge) make a model that is not a generalization of EU or EV. There must be something deadly wrong if the model is not a generalization of EU or EV.

Edit: I understand that EU is a good model. I am looking for some conceptual rationale that generalization of EU is good while non-generalization of EU or EV is not good.

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  • $\begingroup$ What is the point of the weird edit of the title? $\endgroup$
    – Michael Greinecker
    Apr 3, 2022 at 14:21
  • $\begingroup$ @MichaelGreinecker Sorry! corrected $\endgroup$
    – High GPA
    Apr 3, 2022 at 15:05
  • $\begingroup$ I still don't get the "deadly" part. $\endgroup$
    – Michael Greinecker
    Apr 3, 2022 at 16:31
  • $\begingroup$ @MichaelGreinecker Just to emphasize that not including EU as a special case is absolutely incorrect: finding why EU is good is not enough. $\endgroup$
    – High GPA
    Apr 3, 2022 at 17:45

1 Answer 1

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Many people accept the axiomatizations of expected utility as normatively appealing, especially in contexts of pure risk. For people with this view, rational decision-makers should behave in accordance with expected utility theory, and failing to do so is a sign of irrationality. One usually does not want to rule out that someone behaves rationally, to begin with.

However, it is not literally true that no one has come up with a model that is not a generalization of expected utility theory. For example, minimax regret contradicts expected utility theory and has been used in economics.

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  • $\begingroup$ Many thanks for the very helpful answer! It is indeed very important for a behavioral decision theory, once the behavioral factor is removed, the decision maker must behave according to EU. I could have been wrong but I thought, in binary choice, minimax regret can be think as a boundary case of the regret theory, which is a generalization of EU. $\endgroup$
    – High GPA
    Feb 4, 2022 at 14:27
  • $\begingroup$ I wonder if there are any citations that I can learn more for your first paragraph. Especially: one usually does not want to rule out that someone behaves rationally (EU), to begin with. $\endgroup$
    – High GPA
    Feb 4, 2022 at 14:39
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    $\begingroup$ I'm not sure of any place that explicitly mentions that EU should be considered for its normative appeal, but most arguments in its favor are normative. $\endgroup$
    – Michael Greinecker
    Feb 4, 2022 at 14:48
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    $\begingroup$ @HighGPA: MWG has a section on the "Discussion of the Theory of Expected Utility" (starting on p.178), in which analytical convenience and normative appeal are touted as two desirable features of EU. $\endgroup$
    – Herr K.
    Feb 5, 2022 at 19:46
  • $\begingroup$ @HerrK. Many thanks for this helpful reference. The question is more about "generalization of EU is golden" rather than "EU is golden". The latter does help a bit, though. $\endgroup$
    – High GPA
    Feb 6, 2022 at 6:20

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