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Where does this idea of rationality come from? It began in Renaissance Italy, for example, in the

analysis of the practice of gambling by scholars such as Girolamo Cardano (1501–1576), a true

Renaissance man who was simultaneously a mathematician, physician, accountant, and

inveterate gambler. (He is also credited with inventing the combination lock.) In spite of his

profound insights into risky decision making, he tended to lose, because his analyses of the

numerical structure of random situations were accompanied by lousy arithmetic skills. The most

recent impetus for the development of a rational decision theory, however, comes from a book

published in 1947 entitled Theory of Games and Economic Behavior by

mathematician John von Neumann and economist Oskar Morgenstern. (The first publication in

1944 omitted some of the most important analyses of decision making, so we cite the 1947

edition.) Von Neumann and Morgenstern provided a theory of decision making according to the

principle of maximizing expected utility. The book does not discuss behavior per se;

rather, it is a purely mathematical work that applies utility theory to optimal economic decisions.

Its relevance to non-economic decisions was assured by basing the theoretical development on

general utility (we prefer the term personal value), rather than solely on monetary outcomes.

This criterion of expected utility may most easily be understood by analyzing simple gambling

situations. Because gambling situations are familiar and well-defined, we will rely on them

heavily (as have most scholars in this area) to illustrate basic concepts, though we will try to

provide a diverse collection of nonmonetary, everyday examples as well. Consider, for example,

a choice between two gambles:

The expected value of each is equal to the probability of winning multiplied by the

amount to be won. Thus, the expected value of gamble (a) is .20 × $45 = $9, while that of

gamble (b) is .25 × $30 = $7.50. People need not, however, prefer gamble (a) simply because

its expected value is higher. Depending upon their circumstances, they may find $30 to have

more than four-fifths the utility of $45, in which case they would—according to the theory—

choose gamble (b). For example, an individual may be out of money at the end of a week and

simply desire to have enough money to eat until the following Monday. In that situation, the

individual may find the difference in utility between $30 and $45 to be negligible compared with

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