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:
“If the heart beguiles itself in its choice [of a wife], and imagination will give excellencies which are not the portion of flesh and blood:Mwhen the dream is over, and we awake in the morning, it matters little whether ‘tis Rachael or Leah,—be the object what it will, as it must be on the earthly side ... of perfection,—it will fall short of the work of fancy, whose existence is in the clouds.”
—Laurence Sterne (1713–1768)
“I think the worst thing this nation could do for humanity would be to leave any uncertainty as to our will, our purpose and our capacity to carry out our purpose.”
—Hubert H. Humphrey (1911–1978)