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<title>Generalized expected utility</title>

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<span id="openzim-page-title" class="mw-page-title-main"><span class="mw-page-title-main">Generalized expected utility</span></span>

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<div id="mw-content-text" class="mw-body-content mw-content-ltr" lang="en" dir="ltr"><div class="mw-content-ltr mw-parser-output" lang="en" dir="ltr"><p><b>Generalized expected utility</b> is a <a href="Decision_theory" title="Decision theory">decision-making</a> metric based on any of a variety of theories that attempt to resolve some discrepancies between <a href="Expected_utility_theory" class="mw-redirect" title="Expected utility theory">expected utility theory</a> and <a href="Empirical_observation" class="mw-redirect" title="Empirical observation">empirical observations</a>, concerning choice under <a href="Risk_(statistics)" class="mw-redirect" title="Risk (statistics)">risky</a> (probabilistic) or uncertain circumstances. Given its motivations and approach, generalized expected utility theory may properly be regarded as a subfield of <a href="Behavioral_economics" title="Behavioral economics">behavioral economics</a>, but it is more frequently located within mainstream <a href="Economic_theory" class="mw-redirect" title="Economic theory">economic theory</a>.

</p><p>The expected utility model developed by <a href="John_von_Neumann" title="John von Neumann">John von Neumann</a> and <a href="Oskar_Morgenstern" title="Oskar Morgenstern">Oskar Morgenstern</a> dominated decision theory from its formulation in 1944 until the late 1970s, not only as a <a href="Prescriptive" class="mw-redirect" title="Prescriptive">prescriptive</a>, but also as a <a href="Descriptive" class="mw-redirect" title="Descriptive">descriptive</a> model, despite powerful criticism from <a href="Maurice_Allais" title="Maurice Allais">Maurice Allais</a> and <a href="Daniel_Ellsberg" title="Daniel Ellsberg">Daniel Ellsberg</a> 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 <a href="Allais_paradox" title="Allais paradox">Allais paradox</a> and <a href="Ellsberg_paradox" title="Ellsberg paradox">Ellsberg paradox</a>.

</p><p>Beginning in 1979 with the publication of the <a href="Prospect_theory" title="Prospect theory">prospect theory</a> of <a href="Daniel_Kahneman" title="Daniel Kahneman">Daniel Kahneman</a> and <a href="Amos_Tversky" title="Amos Tversky">Amos Tversky</a>, 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 <a href="Rank-dependent_expected_utility" title="Rank-dependent expected utility">rank-dependent utility theory</a>,<sup id="cite_ref-1" class="reference"><a href="#cite_note-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> weighted utility (Chew 1982), and expected uncertain utility theory.<sup id="cite_ref-2" class="reference"><a href="#cite_note-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup> A general representation, using the concept of the local utility function was presented by <a href="Mark_J._Machina" title="Mark J. Machina">Mark J. Machina</a>.<sup id="cite_ref-3" class="reference"><a href="#cite_note-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays <a href="Cumulative_prospect_theory" title="Cumulative prospect theory">cumulative prospect theory</a>, a rank-dependent development of prospect theory, introduced in 1992 by <a href="Daniel_Kahneman" title="Daniel Kahneman">Daniel Kahneman</a> and <a href="Amos_Tversky" title="Amos Tversky">Amos Tversky</a>.

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<div class="mw-heading mw-heading2"><h2 id="References">References</h2></div>

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</style><cite id="CITEREFQuiggin1982" class="citation journal cs1"><a href="John_Quiggin" title="John Quiggin">Quiggin, John</a> (1982). "A theory of anticipated utility". <i>Journal of Economic Behavior & Organization</i>. <b>3</b> (4): <span class="nowrap">323–</span>343. <a href="Doi_(identifier)" class="mw-redirect" title="Doi (identifier)">doi</a>:<a rel="nofollow" class="external text" href="https://doi.org/10.1016%2F0167-2681%2882%2990008-7">10.1016/0167-2681(82)90008-7</a>.</cite></span>

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<li id="cite_note-2"><span class="mw-cite-backlink"><b><a href="#cite_ref-2">^</a></b></span> <span class="reference-text"><cite id="CITEREFGulPesendorfer2009" class="citation journal cs1">Gul, Faruk; Pesendorfer, Wolfgang (2009). <a rel="nofollow" class="external text" href="http://www.dklevine.com/archive/refs4122247000000002185.pdf">"Measurable Ambiguity"</a> <span class="cs1-format">(PDF)</span>. <i>Levine's Working Paper Archive</i>.</cite></span>

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<li id="cite_note-3"><span class="mw-cite-backlink"><b><a href="#cite_ref-3">^</a></b></span> <span class="reference-text"><cite id="CITEREFMachina1982" class="citation journal cs1">Machina, Mark J. (1982). <a rel="nofollow" class="external text" href="http://www.dklevine.com/archive/refs47650.pdf">"'Expected Utility' Analysis Without the Independence Axiom"</a> <span class="cs1-format">(PDF)</span>. <i><a href="Econometrica" title="Econometrica">Econometrica</a></i>. <b>50</b> (2): <span class="nowrap">277–</span>323. <a href="Doi_(identifier)" class="mw-redirect" title="Doi (identifier)">doi</a>:<a rel="nofollow" class="external text" href="https://doi.org/10.2307%2F1912631">10.2307/1912631</a>. <a href="JSTOR_(identifier)" class="mw-redirect" title="JSTOR (identifier)">JSTOR</a> <a rel="nofollow" class="external text" href="https://www.jstor.org/stable/1912631">1912631</a>.</cite></span>

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