Choice Under Uncertainty
In the expected utility theory of von Neumann and Morgenstern, four axioms together imply that individuals act in situations of risk as if they maximize the expected value of a utility function. One of the axioms is a version of the IIA axiom:
- If, then for any and ,
where p is a probability and means that M is preferred over L. This axiom says that if one outcome (or lottery ticket) L is considered to be not as good as another (M), then having a chance with probability p of receiving L rather than N is considered to be not as good as having a chance with probability p of receiving M rather than N.
Read more about this topic: Independence Of Irrelevant Alternatives
Famous quotes containing the words choice and/or uncertainty:
“Stupid or smart, there wasn’t much choice about what was going to happen to me ... Growing up was like falling into a hole.... I might not quit school, not while Mama had any say in the matter, but what difference would that make? What was I going to do in five years? Work in the textile mill? Join Mama at the diner? It all looked bleak to me. No wonder people got crazy as they grew up.”
—Dorothy Allison (b. 1953)
“Now, since our condition accommodates things to itself, and transforms them according to itself, we no longer know things in their reality; for nothing comes to us that is not altered and falsified by our Senses. When the compass, the square, and the rule are untrue, all the calculations drawn from them, all the buildings erected by their measure, are of necessity also defective and out of plumb. The uncertainty of our senses renders uncertain everything that they produce.”
—Michel de Montaigne (1533–1592)