Abstract
IN neoclassical economic theory, utility functions and indifference curves provide a mechanism for the analysis of how consumers and other decision makers make choices among alternative goods or courses of action. The neoclassical model is a theory of behavior under certainty, however, and does not provide much help in the analysis of choices involving uncertain outcomes. Fortunately, the gap was filled by the introduction of the expected utility hypothesis (or theorem) by von Neumann and Morgenstern in their pathbreaking work, Theory of Games and Economic Behavior.2 The expected utility hypothesis can be described simply as follows. Suppose an individual with wealth W derives utility from that wealth according to a function U(W). U(W) is the amount of utility derived from wealth W and is assumed to increase as W increases. Now suppose that the individual is faced with the following choices: (A) a certain wealth of $9,000; (B) a wealth of $10,000 with probability p and of $8,000 with probability 1 p. According to the expected utility hypothesis the individual will prefer alternative A if
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
