Title: Utility, subjective probability, their interaction, and variance preferences
Abstract:In 1738 Daniel Bernoulli, puzzled about why people buy insurance even though insurance companies must take in more money as premiums than they pay out in benefits, proposed a theory of decisionmaking ...In 1738 Daniel Bernoulli, puzzled about why people buy insurance even though insurance companies must take in more money as premiums than they pay out in benefits, proposed a theory of decisionmaking which asserts that people choose among risky courses of action in such a way as to maximize their expected utility (Bernoulli, 1738; Sommer, 1954). The word utility is a name for the concept of subjective value, which may be quite different from objective or dollar value. This theory was put into moder and sophisticated mathematical form in 1944 by von Neumann and Morgenstern in their famousRead More