expected utility theory

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A theory of decision making, formalized in 1947 by the Hungarian-born US mathematician John von Neumann (1903–57) and the German-born US economist Oskar Morgenstern (1902–77), according to which a decision maker chooses actions or strategies that maximize expected utility, and utilities are determined by revealed preferences. If the probabilities are subjective, then it is called subjective expected utility theory. See also Allais paradox, cancellation heuristic, common ratio effect, Ellsberg paradox, modified Ellsberg paradox, Newcomb's problem, Pascal's wager, preference reversal (1, 2), prospect theory, rational choice theory, Ultimatum game, utility theory. EU theory abbrev.

Subjects: Psychology — Social Sciences.

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