Expected Utility Theory

45 Pages Posted: 29 Nov 2007

See all articles by Simon Grant

Simon Grant

Rice University - Department of Economics; Australian National University

Timothy Van Zandt

INSEAD - Economics and Political Sciences; Centre for Economic Policy Research (CEPR)

Date Written: November 25, 2007

Abstract

This is a chapter for the forthcoming Handbook of Rational and Social Choice, Paul Anand, Prasanta Pattanaik, and Clemens Puppe, eds., Oxford University Press, 2008. We review classic normative expected utility theory. Our goal is to frame the subsequent chapters (which consider more modern extensions to and deviations from this classic theory) in a way that is accessible to the nonspecialist but also useful to the specialist. We start from scratch with a revealed preference approach to the existence of a utility function. We then present the mathematical structure of additive and linear utility representations and their axiomatizations, in the context of abstract choice theory and using intertemporal choice as a source of examples. We are thus able to focus on this mathematical structure without the interference of the specific interpretation and notation for decision under uncertainty. Furthermore, this approach allows us to focus on the interpretation of the axioms when we turn to decision under uncertainty.

Suggested Citation

Grant, Simon Harold and Van Zandt, Timothy, Expected Utility Theory (November 25, 2007). INSEAD Business School Research Paper No. 2007/71/EPS. Available at SSRN: https://ssrn.com/abstract=1033982 or http://dx.doi.org/10.2139/ssrn.1033982

Simon Harold Grant (Contact Author)

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States
713-348-3332 (Phone)
713-348-6329 (Fax)

Australian National University ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia
61-2-6125-4602 (Phone)
61-2-6125-3051 (Fax)

Timothy Van Zandt

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4981 (Phone)
+33 1 6074 6192 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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