By John Eatwell, Murray Milgate, Peter Newman (eds.)
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Additional info for Utility and Probability
It was really not until the last 30 years that it has been used systematically as an economic explanation, and indeed its use coincided with the first experimental evidence against it (see Allais, 1979). The expected-utility hypothesis is an interesting transition to the theme of the next section. It is in fact a stronger hypothesis than mere maximization. As such it is more easily tested, and it leads to stronger and more interesting conclusions. So much, however, has already been written about this area that I will not pursue it further here.
Allais and O. Hagen, Boston: Reidel. J. 1953. Le role des va leurs boursieres dans la repartition la meilleure des risques. In Econometrie, Paris: Centre National de la Recherche Scientifique. J. 1979. The property rights doctrine and demand revelation under incomplete information. In Economics and Human Welfare, ed. J. Boskin, New York: Academic Press. J. 1976. Agreeing to disagree. Annals of Statistics 4, 1236-9. Cass, D. and Shell, K. 1983. Do sunspots matter? Journal of Political Economy 91,193-227.
Formally, this is equivalent to considering an entire class of problems that can be ranked in their uncertainty as measured by a parameter e and whose limit is the certain problem. The question is then to know under what conditions the solution to the limit of the random problems, that is equal to the one of the certain problem, is independent of e to the first order, so that dE[x:('11, ... , '1t)e] = 0 de for e = O. This slightly different point of view is called the 'first order certainty equivalence' problem and has been dealt with by Theil (1957) and Malinvaud (1969).