# Generalized expected utility

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'''Generalized expected utility''' is a [decision-making](/source/decision_theory) metric based on any of a variety of theories that attempt to resolve some discrepancies between [expected utility theory](/source/expected_utility_theory) and [empirical observation](/source/empirical_observation)s, concerning choice under [risky](/source/risk_(statistics)) (probabilistic) or uncertain circumstances. Given its motivations and approach, generalized expected utility theory may properly be regarded as a subfield of [behavioral economics](/source/behavioral_economics), but it is more frequently located within mainstream [economic theory](/source/economic_theory).

The expected utility model developed by [John von Neumann](/source/John_von_Neumann) and [Oskar Morgenstern](/source/Oskar_Morgenstern) dominated decision theory from its formulation in 1944 until the late 1970s, not only as a [prescriptive](/source/prescriptive), but also as a [descriptive](/source/Descriptivist_theory_of_names) model, despite powerful criticism from [Maurice Allais](/source/Maurice_Allais) and [Daniel Ellsberg](/source/Daniel_Ellsberg) who showed that, in certain choice problems, decisions were usually inconsistent with the axioms of expected utility theory. These problems are usually referred to as the [Allais paradox](/source/Allais_paradox) and [Ellsberg paradox](/source/Ellsberg_paradox). 

Beginning in 1979 with the publication of the [prospect theory](/source/prospect_theory) of [Daniel Kahneman](/source/Daniel_Kahneman) and [Amos Tversky](/source/Amos_Tversky), a range of generalized expected utility models were developed with the aim of resolving the Allais and Ellsberg paradoxes, while maintaining many of the attractive properties of expected utility theory. Important examples were anticipated utility theory, later referred to as [rank-dependent utility theory](/source/Rank-dependent_expected_utility),<ref>{{cite journal |author-link=John Quiggin |first=John |last=Quiggin |title=A theory of anticipated utility |journal=Journal of Economic Behavior & Organization |volume=3 |year=1982 |issue=4 |pages=323–343 |doi=10.1016/0167-2681(82)90008-7 }}</ref> weighted utility (Chew 1982), and expected uncertain utility theory.<ref>{{cite journal |first1=Faruk |last1=Gul |first2=Wolfgang |last2=Pesendorfer |year=2009 |title=Measurable Ambiguity |journal=Levine's Working Paper Archive |url=http://www.dklevine.com/archive/refs4122247000000002185.pdf }}</ref> A general representation, using the concept of the local utility function was presented by [Mark J. Machina](/source/Mark_J._Machina).<ref>{{cite journal |first=Mark J. |last=Machina |title='Expected Utility' Analysis Without the Independence Axiom |journal=[Econometrica](/source/Econometrica) |volume=50 |year=1982 |issue=2 |pages=277–323 |doi=10.2307/1912631 |jstor=1912631 |url=http://www.dklevine.com/archive/refs47650.pdf }}</ref> Since then, generalizations of expected utility theory have proliferated, but the probably most frequently used model is nowadays [cumulative prospect theory](/source/cumulative_prospect_theory), a rank-dependent development of prospect theory, introduced in 1992 by [Daniel Kahneman](/source/Daniel_Kahneman) and [Amos Tversky](/source/Amos_Tversky).

== References ==
{{Reflist}}

Category:Expected utility
Category:Motivation
Category:Optimal decisions

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