04-30 Lecture Slides (Final)

And cons expected utility theory n example deciding

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: er ideal circumstances in making decisions n༆  Analogous to laws of physics Utility Theories n༆  Utility theories serve as “normative” models that describe ideal performance under ideal circumstances ¨༊  Expected utility theory ¨༊  Multiattribute utility theory n༆  The central idea behind utility theories ¨༊  We try to maximize “utility” n༆  Utility = the subjective value associated with a particular circumstance ¨༊  Formal (mathematical) ways to “weigh the pros and cons” Expected Utility Theory n༆  Example: Deciding whether to buy a lottery ticket n༆  One way to formalize: ¨༊  It’s a $5 ticket, 1/100 chance of winning $200 ¨༊  Expected value = (probability of the outcome) x (monetary value of the outcome) n༆  n༆  Expected value = $200 x .01 = $2 < $5 (Not worth it) Generalized formula: ¨༊  Expected utility = (probability of the outcome) x (utility of the outcome)...
View Full Document

Ask a homework question - tutors are online