ABSTRACT
The standard expected utility form of preferences is an intuitively appealing model of decision making under uncertainty that provides powerful insights for a wide range of economic decisions. But there are also puzzling behaviors that are difficult to reconcile with this model. This chapter highlights some of the most well-known anomalies of expected utility, including the Allais paradox and Ellsberg paradox. The common ancillary assumption that individuals are risk averse (or risk neutral) is also challenged. The anomalies in this chapter are organized in two sections. The first section considers decision problems with known probabilities for each possible outcome. The second section turns to settings with uncertainty where there is ambiguity about the probabilities. In both cases the standard expected utility form of preferences fails to explain typical preferences.
