Utility Theory: Pro, Con & Indifferent

Discussion by MIT:

The branch of decision theory concerned with measurement and representation of preferences is called utility theory. Utility theorists focus on accounts of preferences in RATIONAL DECISION MAKING, where an individual's preferences cohere with associated beliefs and actions. Utility refers to the scale on which preference is measured. Rational decision making is choosing among alternatives in a way that "properly" accords with the preferences and beliefs of an individual decision maker or those of a group making a joint decision.

The term refers to a variety of notions, with each conception of alternatives and proper accord with preferences and beliefs yielding a "rationality" criterion. At its most abstract, the subject concerns unanalyzed alternatives (choices, decisions) and preferences reflecting the desirability of the alternatives and rationality criteria such as maximal desirability of chosen alternatives with respect to the preference ranking. More concretely, one views the alternatives as actions in the world, and determines preferences among alternative actions from preference rankings of possible states of the world and beliefs or probability judgments about what states obtain as outcomes of different actions, as in the maximal expected utility criterion of decision theory and economics.

Questioning Utility Theory

The following article is from The National Science Foundation.

Utility theory postulates that it should not matter how alternatives are presented. Once we know what's at stake, and the risks involved, we should have enough awareness of ourselves to make the choice that serves us best.

In fact, psychologists Daniel Kahneman of Princeton and the late Amos Tversky of Stanford demonstrated that the way alternatives are framed can make quite a difference in our choices. In one of their most famous studies, they presented people with a choice between two programs that addressed a public health threat to the lives of 600 people.

When the outcomes of the programs were described as (a) saving 200 lives for sure, or (b) a one-third chance to save 600 lives and a two-thirds chance to save no one, most respondents preferred the first option. But when the outcomes were presented as (a) 400 people dying for sure, or (b) a two-thirds chance of 600 people dying and a one-third chance that no one would die, most respondents preferred the second option. Of course, the two versions of the problem are the same, because the people who will be saved in one version are the same people who will not die in the other. What happens here is that people are generally risk-averse in choices between sure gains and favorable gambles, and generally risk-seeking in choices between sure losses and unfavorable gambles. "Some propensities," points out former NSF Program Director Jonathan Leland, "are so ingrained that the trick is to help people understand why their decisions are bad." No one, it seems, is immune to the power of the well-chosen word.