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The Mind of a Gambler: Why Do People Maximize Expected Utility Rather Than Expected Value?
In today's economics, the decision-making theory of gambling and risk occupies an important position, especially the assumption of "expected utility" which has become the core of economists' understanding of human choice and behavior. This hypothesis asserts that rational actors choose those options that maximize their utility, meaning that they make comparisons based on the subjective satisfaction of actions.
The expected utility hypothesis states that when faced with risk, actors make choices by comparing the expected utility values of different options.
However, why do people choose expected utility rather than pure expected value in real life? First, we need to understand its background. In 1713, Nicholas Bernoulli proposed the St. Petersburg Paradox, which introduced the problem of infinite expected value into economic discussions. This paradox prompted two Swiss mathematicians to develop expected utility theory as a solution. They discovered that a person's marginal utility of money decreases as wealth increases, which is a core psychological phenomenon.
Bernoulli proposed that rich and poor people feel the value of the same money differently, and expected utility theory can better explain this.
According to this theory, gamblers do not only consider the possible benefits when making choices, but more importantly, the satisfaction and risk tolerance brought by these benefits. For example, for the same 100-dollar gamble, the effectiveness of this 100-dollar gambler is far less than the value to a person living in poverty. Therefore, in addition to quantifying expected value, gamblers' behavior must also consider their risk preferences and psychological utility.
In the 20th century, psychologists and economists conducted a series of experiments and found that people's behavior often did not conform to the assumption of expected value maximization. They proposed new theories such as expectancy theory, order-dependent expected utility theory, and cumulative expectancy theory, which can better capture the choices humans make in actual behavior.
Many studies have shown that human decision-making is not always based on rational expectations, but is driven by emotions and psychology.
For example, expectancy theory suggests that people will be more alert to losses when faced with gambling choices and more optimistic when faced with potential gains. Such behavioral drivers come from the discrepancy between human perceptions of risk and actual risk attitudes.
However, what is the essential difference between expected utility and expected value? Expected utility better reflects an individual’s psychological state when facing uncertainty and risk. For gamblers, faced with a gambling game with exchange rate fluctuations, they choose not only the maximum return value, but the "confidence" they hope to gain, which is related to their financial status, gambling experience and psychological state. closely related.
In the face of risk, human decision-making behavior often makes it closer to maximizing expected utility rather than expected value itself.
In many cases, gamblers' behavior reflects their emotions, risk attitudes, and sociocultural backgrounds, and this is evident both in difficult gambling situations and in relatively stable environments. Furthermore, when making choices, gamblers need to consider how to manage their risks and possible consequences. This is also one of the important reasons for calculating expected utility.
So, what drives people to always choose to maximize expected utility rather than just focusing on expected value when making decisions between risks and returns?
