PSYCH 4508 Lecture Notes - Lecture 4: Subjective Expected Utility, Allais Paradox, Decision Theory
9 Sep 2016
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A normative, rational decision theory: subjective expected utility (seu) Subjective expected utility theory: expected utility (eu) theory is a generalization of expected value (ev) theory. Eu uses utilities rather than values: subjective expected utility (seu) theory is a generalization of expected utility (eu) theory. Seu allows for the use of subjective probability estimates. Seu is often referred to simply as eu: eu or seu decision making leads to the best aggregate outcome, in the long run. Seu for unique one-time decisions: axioms are foundational assumptions or criteria; here, the axioms describe the rules that we assume a rational decision-maker follows, axioms provide a rationale for using seu decision making for unique one-time decisions. If you adhere to the axioms when making decisions. It is possible to associate a utility with each outcome. And compute the expected utility of each alternative. And show that a person will choose the alternative with the higher expected utility.
