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) circumstances. Given its motivations and approach, generalized expected utility theory may properly be regarded as a subfield of

behavioral economics Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory. ...

, but it is more frequently located within mainstream economic theory. The expected utility model developed by John von Neumann and Oskar Morgenstern 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 (born April 7, 1931) is an American political activist, and former United States military analyst. While employed by the RAND Corporation, Ellsberg precipitated a national political controversy in 1971 when he released the ''Pent ...

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 and Ellsberg paradox. Beginning in 1979 with the publication of the prospect theory of

Daniel Kahneman Daniel Kahneman (; he, דניאל כהנמן; born March 5, 1934) is an Israeli-American psychologist and economist notable for his work on the psychology of judgment and decision-making, as well as behavioral economics, for which he was award ...

and

Amos Tversky Amos Nathan Tversky ( he, עמוס טברסקי; 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 ...

, 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 Mark Joseph Machina (born October 27, 1954) is an American economist noted for work in non-standard decision theory. He is currently a distinguished professor at the University of California, San Diego. The Marschak–Machina triangle, a pr ...

. Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays cumulative prospect theory, a rank-dependent development of prospect theory, introduced in 1992 by

and

References

Expected utility Motivation Optimal decisions {{econ-stub