Economics versus psychology.Risk, uncertainty and the expected utility theory

Schilirò, Daniele (2017): Economics versus psychology.Risk, uncertainty and the expected utility theory. Published in: Journal of Mathematical Economics and Finance , Vol. 3, No. 1 (July 2017): pp. 1-12.

Abstract

The present contribution examines the emergence of expected utility theory by John von Neumann and Oskar Morgenstern, the subjective the expected utility theory by Savage, and the problem of choice under risk and uncertainty, focusing in particular on the seminal work “The Utility Analysis of Choices involving Risk" (1948) by Milton Friedman and Leonard Savage to show how the evolution of the theory of choice has determined a separation of economics from psychology.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rational Choice; Risk; Uncertainty; Expected Utility Theory
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty

References

[1] Allais, M. (1953). Le comportement de l’homme rationnel devant de le risque: Critique des postulats et axioms de l’école americaine. Econometrica 21, 503–546.

[2] Bernoulli, D. (1954). Exposition of a new theory on the measurement of risk. Econometrica 22, 23–36. Translation of Bernoulli D. (1738). Specimen theoriae novae de mensura sortis. Papers Imp. Acad. Sci. St. Petersburg, 5, 175–192.

[3] de Finetti, B. (1937). La prévision: ses lois logiques, ses sources subjectives. Annales de l’Institut Henri Poincaré. Translation of the 1937 article in english: Foresight: its Logical Laws, Its Subjective Sources. In H. E. Kyburg and H. E. Smokler (Eds.), Studies in Subjective Probability. New York: Wiley, 1964.

[4] Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics 75, 643–659. Friedman, M. (1953). The methodology of positive economics. In M. Friedman (Ed.), Essays in Positive Economics. Chicago: University of Chicago Press.

[5] Friedman, M. and L. Savage (1948). The utility analysis of choices involving risks. Journal of Political Economy 56 (4), 279–304.

[6] Friedman, M. and L. Savage (1952). The expected-utility hypothesis and the measurability of utility. Journal of Political Economy 60 (6), 463–474.

[7] Kahneman, D. and A. Tversky (1979). Prospect theory: an analysis of decision under risk. Econometrica 47, 263–292. Karni, E. (2014). Axiomatic foundations of expected utility and subjective probability. In M. Machina and W. K. Viscusi (Eds.), Handbook of the Economics of Risk and Uncertainty. Vol. 1. Oxford: North Holland.

[8] Levy, H. and Z. Wiener (2013). Prospect theory and utility theory: Temporary versus permanent attitude towards risk. Journal of Economics and Business 68, 1–23.

[9] Markovitz, H. (1952). The utility of wealth. Journal of Political Economy 60, 151–158.

[10] Marshack, J. (1950). Rational behavior, uncertain prospects and measurable utility. Econometrica 18 (2), 111–141.

[11] Mengov, G. (2015). Utility and rationality. In G. Mengov (Ed.), Decision Science: A Human-Oriented Perspective. Berlin, Heidelberg: Springer-Verlag.

[12] Mongin, P. (1997). Expected utility theory. In W. H. J. Davis and U. Maki (Eds.), Handbook of Economic Methodology, pp. 342–350. London: Edward Elgar.

[13] Moscati, I. (2016). Retrospectives: How economists came to accept expected utility theory: The case of Samuelson and Savage. Journal of Economic Perspectives 30 (2), 219–236.

[14] Rabin, M. and R. Thaler (2001). Anomalies. risk aversion. Journal of Economic Perspectives 15 (1), 219–233.

[15] Ramsey, F. P. (1926). Truth and probability. In R. Braithwait (Ed.), The Foundations of Mathematics and other Logical Essays, Chapter VII, 156–198. London: Kegan, Paul, Trench, Trubner & Co., New York: Harcourt, Brace and Company (1999 electronic edition.

[16]Samuelson, P. A. (1952). Probability, utility, and the independence axiom. Econometrica 20 (4), 670–678. Savage, L. (1954). The Foundations of Statistics. New York: John Wiley and Sons.

[17] Schilirò, D. (2012). Bounded rationality and perfect rationality: Psychology into economics. Theoretical and Practical Research in Economic Fields III (2), 101–111.

[18] Schilirò, D. (2013). Bounded rationality: Psychology, economics and financial crisis. Theoretical and Practical Research in Economic Fields IV (1), 97–108.

[19] Schilirò, D. (2016). Economics and psychology. the framing of decisions. Journal of Mathematical Economics and Finance II (2), 77–88.

[20] von Neumann, J. and O. Morgenstern (1947). Theory of games and economic behavior. 2nd edition. Princeton: Princeton University Press.