| Chapter 12 Expected utility theory: not intended to describe how people behave but how they would behave if were rational Figure out what we want and how to get it and then decide what choice to make Assign value to outcomes and assess probability of getting them Assumptions/axioms of expected utility theory Comparability: when faced with two alternatives, people should have at least a weak preference for one or the other Transitivity: if prefer outcome A to B to C, we should prefer A to C If have intransitive preferences, it can lead to a money pump Distribution of probabilities across alternatives: we should not be affected by the way the situation is presented; a multiple-stage gamble can be conceptualized as a one-stage gamble |
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