Generalized expected utility is a decision-making metric based on any of a variety of theories that attempt to resolve some discrepancies between

expected utility theory The expected utility hypothesis is a popular concept in economics that serves as a reference guide for decisions when the payoff is uncertain. The theory recommends which option rational individuals should choose in a complex situation, based on the ...

and

empirical observation Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences and ...

s, concerning choice under risky (probabilistic) circumstances. Given its motivations and approach, generalized expected utility theory may properly be regarded as a subfield of behavioral economics, but it is more frequently located within mainstream

economic theory Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

. The expected utility model developed by

John von Neumann John von Neumann (; hu, Neumann János Lajos, ; December 28, 1903 – February 8, 1957) was a Hungarian-American mathematician, physicist, computer scientist, engineer and polymath. He was regarded as having perhaps the widest cove ...

and

Oskar Morgenstern Oskar Morgenstern (January 24, 1902 – July 26, 1977) was an Austrian-American economist. In collaboration with mathematician John von Neumann, he founded the mathematical field of game theory as applied to the social sciences and strategic decis ...

dominated decision theory from its formulation in 1944 until the late 1970s, not only as a

prescriptive Linguistic prescription, or prescriptive grammar, is the establishment of rules defining preferred usage of language. These rules may address such linguistic aspects as spelling, pronunciation, vocabulary, syntax, and semantics. Sometimes infor ...

, but also as a

descriptive In the study of language, description or descriptive linguistics is the work of objectively analyzing and describing how language is actually used (or how it was used in the past) by a speech community. François & Ponsonnet (2013). All acad ...

model, despite powerful criticism from

Maurice Allais Maurice Félix Charles Allais (31 May 19119 October 2010) was a French physicist and economist, the 1988 winner of the Nobel Memorial Prize in Economic Sciences "for his pioneering contributions to the theory of markets and efficient utilization o ...

and Daniel Ellsberg who showed that, in certain choice problems, decisions were usually inconsistent with the axioms of expected utility theory. These problems are usually referred to as the

Allais paradox The Allais paradox is a choice problem designed by to show an inconsistency of actual observed choices with the predictions of expected utility theory. Statement of the problem The Allais paradox arises when comparing participants' choices in two ...

and

Ellsberg paradox In decision theory, the Ellsberg paradox (or Ellsberg's paradox) is a paradox in which people's decisions are inconsistent with subjective expected utility theory. Daniel Ellsberg popularized the paradox in his 1961 paper, “Risk, Ambiguity, an ...

. Beginning in 1979 with the publication of the

prospect theory Prospect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics. Based ...

of Daniel Kahneman and Amos Tversky, a range of generalized expected utility models were developed with the aim of resolving the Allais and Ellsberg paradoxes, while maintaining many of the attractive properties of expected utility theory. Important examples were anticipated utility theory, later referred to as rank-dependent utility theory, weighted utility (Chew 1982), and expected uncertain utility theory. A general representation, using the concept of the local utility function was presented by Mark J. Machina. Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays

cumulative prospect theory Cumulative prospect theory (CPT) is a model for descriptive decisions under risk and uncertainty which was introduced by Amos Tversky and Daniel Kahneman in 1992 (Tversky, Kahneman, 1992). It is a further development and variant of prospect theor ...

, a rank-dependent development of prospect theory, introduced in 1992 by Daniel Kahneman and Amos Tversky.

References

Expected utility Motivation Optimal decisions {{econ-stub