Expected Utility Theory Sample Clauses

Expected Utility Theory. Rational choice expected utility theory (see xxx Xxxxxxx and Xxxxxxxxxxx, 1947) provides the foundation for game theoretical studies of international relations and, until recently, has been the primary model used to explain risk-taking in political science (Xxxxxx 1994). Simply put, actors are utility maximizers. Underlying the theory are the basic axioms that an actor’s preferences over the outcomes of some action are ordered, complete, transitive, and fixed (see Xxxxxx 1994, 16-23). When given a choice an actor will try to maximize her expected utility by weighting the utility of each possible outcome of a given course of action by the probability of its occurrence, summing all possible outcomes for each strategy, and selecting the strategy with the highest expected utility (Levy 1997, 88). The effect of an actor’s risk propensity is most apparent when comparing choices involving two options that have the same expected value but vary in their probabilities and payoffs. Recall the example above where a decision maker is given the choice between a certain win of $100 or a 50/50 xxxxxx for $200 or nothing. The risk neutral decision maker would be indifferent to this choice, since the expected utilities of the xxxxxx or the certain win are the same. An actor with a convex or upward curving utility function indicates someone who has an increasing marginal utility for money (as compared to a risk-neutral actor), and is therefore risk-acceptant and would prefer the 50/50 xxxxxx. On the other hand, a concave or downward curving utility function indicates than actor has a diminishing marginal utility for money, and is therefore risk- averse and would prefer the certain win of $100 (Xxxxxx 1987; X’Xxxxx 2001). Thus, “Risk propensities capture the fact that different decision makers may make different choices when faced with the same set of alternatives solely because of their attitudes towards choosing options with probabilistic outcomes” (Xxxx, Xxxxxxx and Xxxxx 0000, 482). In many models a risk preference, often risk aversion or risk neutrality, is assumed for all actors.5 In the bargaining model of war, for instance, Xxxxxx assumes that states are risk-averse or risk-neutral, because “leaders do not like gambling when the downside risk is losing at war” (1995, 388). He continues, “A risk-acceptant leader is analogous to a compulsive gambler – willing to accept a sequence of gambles that has the expected outcome of eliminating the state and regime. Even if we ad...