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:
“In this choice of inheritance we have given to our frame of polity the image of a relation in blood; binding up the constitution of our country with our dearest domestic ties; adopting our fundamental laws into the bosom of our family affections; keeping inseparable and cherishing with the warmth of all their combined and mutually reflected charities, our state, our hearths, our sepulchres, and our altars.”
—Edmund Burke (1729–1797)
“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)