Questions tagged [expected-utility]
The expected utility theory deals with the analysis of choices among risky projects with multiple possible outcomes.
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Experiments contradicting the expected utility model
This is a question I asked on the cognitive science beta which never got any answer there. I do not know what the policy should be for question migration/reposting (maybe worth discussing in the meta?)...
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Can the Machina Paradox be solved by expanding the choice set?
In another question, the Machina paradox is mentioned as a possible counterexample to the expected utility model:
Adding to the list of paradoxes, consider Machina's paradox. It is described in Mas-...
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Who is the first one to equate "rational" with "complete and transitive preference"?
MWG taught that, suppose that the menu is finite, "rational" is the same as "complete and transitive". But it seems that it does not cite any sources. Who said this first?
vNM said ...
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What is the consensus (if any) on Peters "The ergodicity problem in economics" (2019)?
Peters (2019) made a splash criticizing the theory of expected utility on the grounds that it implicitly assumes ergodicity where this is unwarranted. He stated this applies widely in economics, to ...
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Question about the Ellsberg Paradox in Expected Utility Theory
The von Neumann-Morgenstern theorem states that, assuming a person's preferences under risk satisfy certain rationality axioms, then there exists a utility function u, the von Neumann utility function,...
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Have there been attempts to measure the value of specific taught skills?
I'm aware there is a body of research concerned with measuring the returns to schooling in general, and there are theoretical pronouncements about what the most valuable things to learn at school are.
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Deriving the CAPM: going from utility of consumption to utility of asset returns
Some textbook presentations of the capital asset pricing model (CAPM) take returns on stocks as a primitive and proceed as if agents derive utility from asset returns. Assuming a concave utility ...
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Current knowledge about the empirics of consumer theory
I would like to get up to speed on the current state of empirical work done to test the assumptions and predictions of consumer theory (think Chapters 1, 2, 3, and 6 of Mas-Colell et al.).
Can anyone ...
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Does risk aversion cause diminishing marginal utility, or vice versa?
Let $A$ be the set of possible states of the world, or possible preferences a person could have. Let $G(A)$ be the set of "gambles" or "lotteries", i.e. the set of probability distributions over $A$. ...
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Will high computing power substitute the certainty-equivalence assumption?
Bloom in a recent JEP paper considers that "the increase in computing power has made it possible to include uncertainty shocks directly in a wide range of models, allowing economists to abandon ...
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Does vNM rationality depend on the good chosen?
The von Neumann-Morgenstern theorem states that, assuming a person's preferences under risk satisfy certain rationality axioms, then there exists a utility function u, the von Neumann utility function,...
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Risk Premium in the Expected Utility Theory
Consider an agent with utility function $u$, initial wealth $\omega$, and a random variable $x$. By definition of the risk premium $R$, we have
$$ Eu(w+x) = u(w+E(x)-R). $$
The classical derivation ...
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Expected value inside a utility function
Lets say Agent 1 has a utility function that depends on the other person, i.e., $u_1(x_1-x_2)$, where $x_i$ is the choice of Agent $i$. Suppose the expected value of $x_2$ is denoted $E[x_2]$.
Can $...
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About Theorem 1.1 (the Expected-Utility Maximization Theorem) in Game Theory: Analysis of Conflict by Roger Myerson
I am self-studying game theory using Myerson's Game Theory: Analysis of Conflict. I got some trouble understanding his proof of Theorem 1.1, the Expected-Utility Maximization Theorem. The Theorem goes ...
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Algebraic approach towards convexity
I have a function: $ u(x) = x_{1} + x_{2} + \min\{x_{1}, x_{2}\}$. How do we algebraically show if it's convex or not? Also, what would be the general way to show if any given function is convex.
