PS260 Lecture Notes - Lecture 19: Utility, Sampling Bias, Problem Solving
Document Summary
According to utility theory, people make decisions by calculating the expected value of. Expected value = (probability of a particular outcome) x (utility of the outcome) For example, the expected value of a lottery ticket that gives you a 1% chance of winning each of their options. Many of our decisions follow the principle of utility maximization, or choosing the option with the greatest expected value. However, many decisions do not follow this principle. For instance, consider the following problem, framed either in terms of lives saved or lives lost: terms of lives saved. in terms of lives lost. People tend to choose the less risky program a if the problem is positively framed in. However, they tend to choose the riskier program b if the problem is negatively framed . Note that the choices in each example are identical from the perspective of utility theory.