Generic Analysis of Utility Models

Abstract

It is now firmly established that expected utility (EU) theory and subjective expected utility (SEU) theory are descriptively invalid (Kahneman and Tversky, 1979; Luce, 1988b;MacCrimmon and Larsson, 1979; Slovic and Lichtenstein, 1983; Weber and Camerer, 1987). Descriptive utility theory is undergoing extensive revision, stimulated by empirical findings that challenge existing theories, and by new theories that more adequately account for the cognitive processes that underly preference behavior (Becker and Sarin,1987; Bell, 1982; Kahneman and Tversky, 1979; Loomes and Sugden, 1982; Luce, 1988a,1990; and Narens, 1985; Quiggin, 1982). Although these developments are undoubtedly salutory for the theory and practice of decision making, it might appear that in the short term they undermine the usefulness of multiattribute utility theory (MAUT), or at least that part of MAUT that is built upon EU or SEU assumptions. (Henceforth, I will refer only to SEU theory., noting that EU theory can be construed as a special case of SEU theory.) A substantial part of MAUT methodology is based on preference assumptions that characterize classes of utility models under the assumption that SEU theory is valid (Keeney and Raiffa, 1976; von Winterfeldt and Edwards, 1986). The strong evidence against the descriptive validity of SEU theory might appear to undermine or even invalidate those parts of MAUT methodology that assume SEU theory in deriving implications from patterns of preference. A major goal of this chapter is to show that this is in fact not the case.