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:
“Nobody is so constituted as to be able to live everywhere and anywhere; and he who has great duties to perform, which lay claim to all his strength, has, in this respect, a very limited choice. The influence of climate upon the bodily functions ... extends so far, that a blunder in the choice of locality and climate is able not only to alienate a man from his actual duty, but also to withhold it from him altogether, so that he never even comes face to face with it.”
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