Bayesian probability is an interpretation of the concept of probability, in which, instead of frequency or propensity of some phenomenon, probability is interpreted as reasonable expectation representing a state of knowledge or as quantification of a personal belief.
In economics, utility is a measure of the satisfaction that a certain person has from a certain state of the world. Over time, the term has been used in at least two different meanings.
In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome.
Decision theory or the theory of rational choice is a branch of probability, economics, and analytic philosophy that uses the tools of expected utility and probability to model how individuals should behave rationally under uncertainty. It differs from the cognitive and behavioral sciences in that it is prescriptive and concerned with identifying optimal decisions for a rational agent, rather than describing how people really do make decisions. Despite this, the field is extremely important to the study of real human behavior by social scientists, as it lays the foundations for the rational agent models used to mathematically model and analyze individuals in fields such as sociology, economics, criminology, cognitive science, and political science.
The expected utility hypothesis is a foundational assumption in mathematical economics concerning decision making under uncertainty. It postulates that rational agents maximize utility, meaning the subjective desirability of their actions. Rational choice theory, a cornerstone of microeconomics, builds this postulate to model aggregate social behaviour.
Oskar Morgenstern was a German-born economist. In collaboration with mathematician John von Neumann, he founded the mathematical field of game theory as applied to the social sciences and strategic decision-making and made major contributions to decision theory.
In decision theory, subjective expected utility is the attractiveness of an economic opportunity as perceived by a decision-maker in the presence of risk. Characterizing the behavior of decision-makers as using subjective expected utility was promoted and axiomatized by L. J. Savage in 1954 following previous work by Ramsey and von Neumann. The theory of subjective expected utility combines two subjective concepts: first, a personal utility function, and second a personal probability distribution.
In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. how much better or worse one outcome is compared to another.
Oskar Perron was a German mathematician.
Francis Joseph Murray was a mathematician, known for his foundational work on functional analysis, and what subsequently became known as von Neumann algebras. He received his BA from Columbia College in 1932 and PhD from Columbia University in 1936. He taught at Duke University.
Robert Duncan Luce was an American mathematician and social scientist, and one of the most preeminent figures in the field of mathematical psychology. At the end of his life, he held the position of Distinguished Research Professor of Cognitive Science at the University of California, Irvine.
Luther Pfahler Eisenhart was an American mathematician, best known today for his contributions to semi-Riemannian geometry.
Nathan Jacobson was an American mathematician.
The Allais paradox is a choice problem designed by Maurice Allais to show an inconsistency of actual observed choices with the predictions of expected utility theory. The Allais paradox demonstrates that individuals rarely make rational decisions consistently when required to do so immediately. The independence axiom of expected utility theory, which requires that the preferences of an individual should not change when altering two lotteries by equal proportions, was proven to be violated by the paradox.
Generalized expected utility is a decision-making metric based on any of a variety of theories that attempt to resolve some discrepancies between expected utility theory and empirical observations, concerning choice under risky (probabilistic) or uncertain circumstances. Given its motivations and approach, generalized expected utility theory may properly be regarded as a subfield of behavioral economics, but it is more frequently located within mainstream economic theory.
Jacob Marschak was an American economist.
In decision theory and economics, ambiguity aversion is a preference for known risks over unknown risks. An ambiguity-averse individual would rather choose an alternative where the probability distribution of the outcomes is known over one where the probabilities are unknown. This behavior was first introduced through the Ellsberg paradox.
In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function. The theorem forms the foundation of expected utility theory.
Edward James McShane was an American mathematician noted for his advancements of the calculus of variations, integration theory, stochastic calculus, and exterior ballistics. His name is associated with the McShane–Whitney extension theorem and McShane integral. McShane was professor of mathematics at the University of Virginia, president of the American Mathematical Society, president of the Mathematical Association of America, a member of the National Science Board and a member of both the National Academy of Sciences and the American Philosophical Society.
The book Mathematical Foundations of Quantum Mechanics (1932) by John von Neumann is an important early work in the development of quantum theory.
