04-30 Lecture Slides (Final)

# And cons expected utility theory n example deciding

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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)...
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## This note was uploaded on 02/18/2014 for the course PSYC 2145 taught by Professor Cheriking during the Spring '07 term at Colorado.

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