Generalized expected utility is a decision-making 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 Economics () is the social 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 analyze ...

. The expected utility model developed by John von Neumann and

Oskar Morgenstern Oskar Morgenstern (January 24, 1902 – July 26, 1977) was an Austrian-American economist. In collaboration with mathematician John von Neumann, he founded the mathematical field of game theory as applied to the social sciences and strategic decis ...

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 Maurice Félix Charles Allais (31 May 19119 October 2010) was a French physicist and economist, the 1988 winner of the Nobel Memorial Prize in Economic Sciences "for his pioneering contributions to the theory of markets and efficient utilization o ...

and Daniel Ellsberg 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. Statement of the problem The Allais paradox arises when comparing participants' choices in two ...

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. Daniel Ellsberg popularized the paradox in his 1961 paper, “Risk, Ambiguity, and ...

. Beginning in 1979 with the publication of the

prospect theory Prospect theory is a theory of behavioral economics and behavioral finance 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. Based ...

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. Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays

cumulative prospect theory 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 and variant of prospect theory. ...

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

and

References

Expected utility Motivation Optimal decisions {{econ-stub