ABSTRACT
This chapter introduces the expected utility framework and also illustrates some classic examples of violations of expected utility such as the Allais and Ellsberg Paradoxes. It also explains the dominant framework for modelling choices Expected Utility Theory (EUT), and its central maxim of maximizing expected utility (MEU). The framework presented above is standard in most analyses of decision making. The status of this framework has been discussed in terms of the distinction between normative and descriptive models, and the distinction between process and 'as-if' models. The chapter representing someone's choices in terms of MEU depends on their preferences satisfying certain basic axioms, and discussed two of the classic demonstrations that people's intuitive preferences violate these axioms through Allais and Ellsberg's problems. Ellsberg concluded that people prefer to bet on outcomes with known probabilities rather than on outcomes with unknown probabilities.
