Utility Theory

Utility theory is the study of quantitative representations of people's preferences and choices. In statistics, the theory of subjective expected utility developed by Ramsey, de Finetti, and Savage offers a well reasoned and mathematically elegant basis for analyses of decision making under uncertainty (see Dicision Theory). Economists rely on theories of ordinal utility for investigations in consumer preferences and equilibrium theory, and on the expected utility theory of von Neumann and Morgenstern for analyses of conflict situations (see Game Theory) and choice among risky prospects. Probabilistic theories of choice and utility developed by mathematical psychologists attempt to model coherent patterns of variability and vagueness in people's judgments and choices. Because probabilistic utility is discussed under LUCE'S CHOICE AXIOM AND GENERALIZATIONS ans RANDOM UTILITY MODELS, it will not be included in the present entry.