Abstract
The expected utility hypothesis – that is, the hypothesis that individuals evaluate uncertain prospects according to their expected level of ‘satisfaction’ or ‘utility’ – is the predominant descriptive and normative model of choice under uncertainty in economics. It provides the analytical underpinnings for the economic theory of risk-bearing, including its applications to insurance and financial decisions, and has been formally axiomatized under conditions of both objective (probabilistic) and subjective (event-based) uncertainty. In spite of evidence that individuals may systematically depart from its predictions, and the development of alternative models, expected utility remains the leading model of economic choice under uncertainty.
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Machina, M.J. (2018). Expected Utility Hypothesis. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_127
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DOI: https://doi.org/10.1057/978-1-349-95189-5_127
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