‘we wish to find the mathematically complete principles which define “rational behavior” for the participants in a social economy, and to derive from them the general characteristics of that behavior’
(Neumann, Morgenstern, Rubinstein, & Kuhn, 1953, p. 31).
von Neumann & Morgenstern, 1953 p. 31
Expected utilities can be derived from desirabilities and probabilities.
One procedure for choosing an action is to compute expected utilities (in the way illustrated) and then perform the action with the highest expected utility.
First illustration is a simple bet.
Which gamble would you prefer?
If you are like me, you are interested in the
expected gain ...
Second illustration is about which of two bets you should
select if you can only choose one.
OK so that was an illustration with money.
I used money to simplify the idea of expected utility.
But what we are really
interested in is preferences.
This is because your preferences do not necessarily vary linearly
with monetary amounts. Once you have the first £100, the next
£100 might not make nearly as much difference to you and so it might
be rational to care a lot less about whether you have it.
Terminology
actions have outcomes
Jeffrey (1983)
Make sure you understand the terminology and can relate it to the scenario.
Be sure to use the terminology consistently, and with precision, in your writing.
We have not yet considered a theory.
But understanding the representation is an essential first
step towards von N & Mo’s objective.
‘we wish to find the mathematically complete principles which define “rational behavior” for the participants in a social economy, and to derive from them the general characteristics of that behavior’
(Neumann et al., 1953, p. 31).
von Neumann & Morgenstern, 1953 p. 31