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:
“Then did they strive with emulation who should repeat most wise maxims importing the necessity of suspicion in the choice of our friends—such as “mistrust is the mother of security,” with many more to the same effect.... But notwithstanding the esteem which they professed for suspicion, yet did they think proper to veil it under the name of caution.”
—Sarah Fielding (1710–1768)
“What a chimera then is man. What a novelty! What a monster, what a chaos, what a contradiction, what a prodigy. Judge of all things, imbecile worm of the earth; depositary of truth, a sink of uncertainty and error: the pride and refuse of the universe.”
—Blaise Pascal (1623–1662)