Is Expected Utility a good theory for explaining how people make Essay

Is Expected Utility a good theory for explaining how people make choices - Essay Example Therefore, it is virtually impossible to distinguish the most important factors from the least important ones. More often than not, economic theorists and scholars in statistics and probability choose to describe one single element of human decision-making and fail to account for a variety of subjective influences and objective circumstances that change the decision-making reality. Theory of Expected Utility is fairly regarded as one of the most challenging, controversial, and sophisticated theories of making choices. Theory of Expected Utility provides a brief insight into how individuals weigh and choose the anticipated utilities of different actions and decisions. Unfortunately, Theory of Expected Utility is too narrow to explain how people make choices: the theory exhibits unbelievable insensitivity to emotional and probabilistic factors and does not account for the natural human striving to preserve emotional and rational status quo by all possible means. Theory of Expected Util ity (or Expected Utility Theory – EUT) is rightly considered as one of the most complex and controversial explanations to how people make choices.... Apparently, EUT relies on the intrinsic striving by humans to be rational and objective in their choices and decisions. It should be noted, that the roots and origins of EUT date back to the middle of the 18th century, when the first solutions to the St. Petersburg paradox were developed (Cohen 1994). Daniel Bernoulli was the first to propose an idea that any expectation and decision-making that follows would be integrally linked to the notion of personal worth or personal utility, which individuals attributed to each particular option (Cohen 1994). Moreover, it was due to Bernoulli that the process of making choices was presented in numerical terms (Cohen 1994). With time, making choices came to exemplify a complex set of rational steps and acts, which laid the ground for making one specified preference over other stated options (Cohen 1994). As a result, EUT was developed to reflect a theoretical belief that any option could be assigned a numerical value, generally described as â⠂¬Å"utility†, with the process of making choices directed toward the option with the highest expected utility (Cohen 1994). Despite its theoretical contribution, EUT is too narrow to reflect, discuss, and predict how people make choices. The growing body of scholarly criticism does not leave any room for EUT. The fact is in that individuals are being governed by a variety of non-rational, emotional, subjective meanings that are beyond the scope of EUT. EUT does not account for the fact that individuals tend to make emotional choices and are willing to preserve their status quo by all possible means. Therefore, EUT can hardly be a relevant means of explaining how people make choices. Rather, it presents only one, narrow dimension of the complex process of taking the