in economics, game theory, and decision theory the expected utility hypothesis refers to a hypothesis concerning people's preferences with regard to choices that have uncertain outcomes (gambles). this hypothesis states that if certain axioms are satisfied, the subjective value associated with a gamble by an individual is the statistical expectation of that individual's valuations of the outcomes of that gamble. this hypothesis has proved useful to explain some popular choices that seem to contradict the expected value criterion (which takes into account only the sizes of the payouts and the probabilities of occurrence), such as occur in the contexts of gambling and insurance. daniel bernoulli initiated this hypothesis in 1738. until the mid twentieth century, the standard term for the expected utility was the moral expectation, contrasted with "mathematical expectation" for the expected value."moral expectation", under jeff miller, earliest known uses of some of the words of mathematics (m), accessed 2011-03-24. the term "utility" was first introduced mathematically in this connection by jevons in 1871; previously the term "moral value" was used. the von neumannâmorgenstern utility theorem provides necessary and sufficient "rationality" axioms under which the expected utility hypothesis holds.journals and publications :: the new school for social research (nssr) ==expected value and choice under risk== in the presence of risky outcomes, a decision maker could use the expected value criterion as a rule of choice: higher expected value investments are simply the preferred ones. for example, suppose there is a gamble in which the probability of getting a $100 payment is 1 in 80 and the alternative, and far more likely, outcome, is getting nothing. then the expected value of this gamble is $1.25. given the choice between this gamble and a guaranteed payment of $1, by this simple expected value theory people would choose the $100-or-nothing gamble. however, under expected utility theory, some people would be risk averse enough to prefer the sure thing, even though it has a lower expected value, while other less risk averse people would still choose the riskier, higher-mean gamble. ==bernoulli's formulation== nicolas bernoulli described the st. petersburg paradox (involving infinite expected values) in 1713, prompting two swiss mathematicians to develop expected utility theory as a solution. the theory can also more accurately describe more realistic scenarios (where expected values are finite) than expected value alone. in 1728, gabriel cramer, in a letter to nicolas bernoulli, wrote, "the mathematicians estimate money in proportion to its quantity, and men of good sense
Belief_revision Decision_theory Economics_of_uncertainty Game_theory Motivational_theories Optimal_decisions Utility