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The Strengths and Limitations of Expected Utility Theory

The Strengths and Limitations of Expected Utility Theory

Abstract

The Strengths and Limitations of Expected Utility Theory SAGE Publications, Inc.1996DOI: 10.1177/0272989X9601600104 George Wu PhD Expected utility (EU) theory has long served as the backbone for decision analysis. The theory has been applied to decision problems in management, public policy, and, most importantly for readers of this journal, medicine. The dominant status enjoyed by EU theory reflects a presumed normative justification: it is often argued that rational, reflective individuals would want to adhere to the basic principles of EU theory. In this issue, Cohen argues that EU theory is inappropriate for medical decisions because these are one-time decisions and expectation is a long-run property that applies only to repetitive decisions. The question of whether EU is an appropriate normative standard is vitally important for medical decision making. However, the arguments Cohen offers are not convincing enough to abandon EU theory in medical or other contexts. The theory does have limitations, but before we abandon a proven theory we must propose alternative theories and scrutinize them as closely as we have scrutinized EU theory. The Importance of Axioms Expected utility is implied and implies a set of axioms : ordering, continuity, independence, and tran- sitivity. Building a normative theory
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