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The secret behind expected utility theory: Why does rational choice not equal the highest return?
In the field of economics, expected utility theory has long been regarded as the cornerstone of the decision-making process. However, the theory's assumptions do not always match actual behavior when people face uncertainty. Why is this? This article will explore the expected utility theory and its impact on decision making and challenge traditional views.
Basic concepts of expected utility theory
According to expected utility theory, rational choosers will select the action that maximizes their utility. In this framework, utility is defined as the subjective value of the consequences of an action. The theory assumes that individuals calculate the expected utility of their chosen actions and make choices based on their numerical values. This means that even if the expected return of an option is higher than other options, individuals will not necessarily choose it.
Historical Background of Expected Utility Theory
The roots of expected utility theory can be traced back to the 18th century, when mathematician Nicolas Bernoulli explored the St. Petersburg paradox. This paradox demonstrates that in certain situations, a rational chooser will not accept an option even if it has infinite expected value. Bernoulli proposed that it is utility rather than expected monetary value that really influences decision making, an insight that led to a new understanding of risk and utility.
Expected utility theory is not just about mathematical calculations, but also a window into human psychology and behavior.
Challenges of psychology and behavioral economics
With the rise of behavioral economics, more and more experiments have begun to show that the traditional expected utility theory is not sufficient to explain decision-making behavior in the real world. Researchers have found that factors such as emotions, psychological biases and social environment can significantly influence people's choices. In many experiments, people's behavior often contradicts theoretical predictions and shows many irrational decision-making processes.
The Emergence of Alternative Theories
In order to explain the shortcomings of expected utility theory, scholars have proposed a variety of alternative theories, such as prospect theory and cumulative prospect theory. These theories emphasize that people's psychological responses to losing and winning are different when faced with risk. For example, according to prospect theory, the outcomes of low-probability events have an unusually strong impact on people's decisions, which is very different from the equilibrium prediction of expected utility theory.
The human decision-making process is not always rational. In fact, our choices are often limited by perception and experience.
Stacked Risk and Utility Complexity
Many studies have pointed out that an individual's risk attitude is very important when making choices, especially under economic pressure. The utility function assumed by expected utility theory usually cannot fully capture how humans really feel when faced with uncertain situations. This different tolerance for risk can lead to situations where seemingly rational choices do not actually achieve the highest return.
Conclusion: Re-examining the connotation of rational choice
After all, although the mathematical model provided by expected utility theory provides a basis for us to understand decision-making, human behavior is much more complicated than the theory assumes. Taking into account emotional, psychological factors and environmental influences, rational choices are no longer simply equivalent to the highest returns. Do you think we should delve deeper into the role of human psychology in economic decision-making in search of a more comprehensive explanation?
