Expectancy Theory Of Work



EXPECTED UTILITY THEORY. = utility theory. The Hungarian-born American mathematician John von Neumann (19031957) and the German-born American economist Oskar Morgenstern (1902-1977) formulated the modern version of expected utility theory of decision-making which indicates that a human decision-maker chooses strategies/actions that maximize "expected utility" (i.e., the average subjective desirability of an outcome/event associated with one's decision or preference for it - calculated by multiplying each of the possible outcomes of the decision by its probability and then summing the resulting products), and where utilities are determined by "revealed preferences" (i.e., a preference inferred from observations of a decision-maker's actual choices) [cf., maximizing/op- timizing hypothesis - posits that people act so as to gain as much utility (regarding happiness, money, etc.) as possible; this is in contrast to the American economist/psychologist Herbert Alexander Simon's (1916-2001) satisficing hypothesis which holds that people act to gain only a certain satisfactory utility level]. When the probabilities are phrased in subjective terms, it is called subjective expected utility theory - formulated by the American decision-theorist Leonard J. Savage (1917-1971) and named by the American psychologist Ward Denis Edwards (1927) - which suggests that a decision-maker chooses an alternative or strategy that maximizes the expected utility of an event/outcome calculated from "subjective probabilities" (degree of belief; cf., taxicab problem) rather than from "objective probabilities" (relative frequencies of observable events). The general notion of utility for decision-making was first indicated in 1738 by the Swiss physicist /mathematician Daniel Bernoulli (1700-1782)

who discussed "moral worth" and explained that the value of something to a person is not simply equivalent to its monetary value, but is based, also, on its subjective "moral worth" (i.e., utility). See also ALLAIS PARADOX/ EFFECT; DECISION-MAKING THEORIES; PASCAL'S PROPOSITION OR WAGER; PROBABILITY THEORY/LAWS; PROSPECT THEORY; TAXICAB PROBLEM/ EFFECT; WELLS EFFECT. REFERENCES

Bernoulli, D. (1738/1968). Hydrodynamica.

New York: Dover. Neumann, J. von, & Morgenstern, O. (1947).

Theory of games and economic behavior. Princeton, NJ: Princeton University Press. Edwards, W. D. (1954). The theory of decision-making. Psychological Bulletin, 51, 380-417. Savage, L. J. (1954). The foundations of statistics. New York: Wiley. Simon, H. A. (1957). Models of man: Social and rational. New York: Wiley. Lurie, S. (1987). A parametric model of utility for two-person distributions. Psychological Review, 94, 42-60. Rapoport, A. (1987). Research paradigms and expected utility models for the provision of step-level public goods. Psychological Review, 94, 74-83. Luce, R. D. (2000). Utility of gains and losses: Measurement, theoretical, and experimental approaches. Mah-wah, NJ: Erlbaum.

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