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Chapter14

Chapter14 - CHAPTER 14 Utility Axioms Paradoxes...

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CHAPTER 14 Utility Axioms Paradoxes & Implications

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Chapter 14 Learning objectives: Axioms for Expected Utility Paradoxes Implication for Utility Assessment Managerial and Policy Implications
Chapter 14 People expected to make choices consistent with maximizing of expected utility Cognitive psychologist have noted that people do not always behave according to expected utility theory Decision Analysis depends on foundational axioms

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Chapter 14 The following example previews some of the issues we will consider: The United States is preparing for an outbreak of an unusual Asian strain of Influenza. Experts expect 600 people to die from the disease. Two programs are available that could be used to combat the disease, but only one can be implemented
Utility Axioms & Paradoxes Program A (Tried and True) 400 people will be saved Program B (Experimental) There is an 80% chance that 600 people will be saved and a 20% chance that no one will be saved Now consider the following two programs: Program C 200 people will die Program D There is a 20% chance that 600 people will die and an 80% chance that no one will die. Would you prefer C or D?

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Axioms for Expected Utility Axioms or assumption relate to the consistency with which an individual expresses preferences from among a series of risky prospects We can call these axioms or rules for clear thinking In the following examples axioms are presented to clarify their meaning
Axioms for Expected Utility Ordering and Transitivity: A decision maker can order (establish preference or indifferences) any two alternatives and the ordering is transitive. Example: Given any alternatives A 1 , A 2 and A 3 either A 1 is preferred to A 2 , A 2 is preferred to A 1 or the decision maker is indifferent between A 1 and A 2 .

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