Generalized expected utility is a

decision-making In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the Cognition, cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be ...

metric based on any of a variety of theories that attempt to resolve some discrepancies between expected utility theory and empirical observations, concerning choice under risky (probabilistic) or uncertain circumstances. Given its motivations and approach, generalized expected utility theory may properly be regarded as a subfield of

behavioral economics Behavioral economics is the study of the psychological (e.g. cognitive, behavioral, affective, social) factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by traditional economi ...

, but it is more frequently located within mainstream

economic theory Economics () is a behavioral science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

. The expected utility model developed by

John von Neumann John von Neumann ( ; ; December 28, 1903 – February 8, 1957) was a Hungarian and American mathematician, physicist, computer scientist and engineer. Von Neumann had perhaps the widest coverage of any mathematician of his time, in ...

and

Oskar Morgenstern Oskar Morgenstern (; January 24, 1902 – July 26, 1977) was a German-born economist. In collaboration with mathematician John von Neumann, he is credited with founding the field of game theory and its application to social sciences and strategic ...

dominated decision theory from its formulation in 1944 until the late 1970s, not only as a prescriptive, but also as a descriptive model, despite powerful criticism from Maurice Allais and

Daniel Ellsberg Daniel Ellsberg (April 7, 1931June 16, 2023) was an American political activist, economist, and United States military analyst. While employed by the RAND Corporation, he precipitated a national political controversy in 1971 when he released th ...

who showed that, in certain choice problems, decisions were usually inconsistent with the axioms of expected utility theory. These problems are usually referred to as the

Allais paradox The Allais paradox is a choice problem designed by to show an inconsistency of actual observed choices with the predictions of expected utility theory. The Allais paradox demonstrates that individuals rarely make rational decisions consistently ...

and

Ellsberg paradox In decision theory, the Ellsberg paradox (or Ellsberg's paradox) is a paradox in which people's decisions are inconsistent with subjective expected utility theory. John Maynard Keynes published a version of the paradox in 1921. Daniel Ellsberg ...

. Beginning in 1979 with the publication of the

prospect theory Prospect theory is a theory of behavioral economics, judgment and decision making that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics. ...

Daniel Kahneman Daniel Kahneman (; ; March 5, 1934 – March 27, 2024) was an Israeli-American psychologist best known for his work on the psychology of judgment and decision-making as well as behavioral economics, for which he was awarded the 2002 Nobel Memor ...

and

Amos Tversky Amos Nathan Tversky (; March 16, 1937 – June 2, 1996) was an Israeli cognitive and mathematical psychologist and a key figure in the discovery of systematic human cognitive bias and handling of risk. Much of his early work concerned th ...

, a range of generalized expected utility models were developed with the aim of resolving the Allais and Ellsberg paradoxes, while maintaining many of the attractive properties of expected utility theory. Important examples were anticipated utility theory, later referred to as rank-dependent utility theory, weighted utility (Chew 1982), and expected uncertain utility theory. A general representation, using the concept of the local utility function was presented by Mark J. Machina. Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays

cumulative prospect theory In behavioral economics, cumulative prospect theory (CPT) is a model for descriptive decisions under risk and uncertainty which was introduced by Amos Tversky and Daniel Kahneman in 1992 (Tversky, Kahneman, 1992). It is a further development ...

, a rank-dependent development of prospect theory, introduced in 1992 by

and

References

Expected utility Motivation Optimal decisions {{econ-stub