Utility, expected utility

The concept of utility enters economic analysis typically via the concept of a utility function which itself is just a mathematical representation of an individualīs preferences over alternative bundels of consumption goods (or, more generally, over goods, services, and leisure). If the individualīs preferences are complete, reflexive, transitive, and continuous, then they can be represented by a continuous utility function. In this sense, utility itself is an almost empty concept: It is just a number associated with some consumption bundle. A general treatment of the existence of an utility function is due to Debreu (1964).

Expected utility (von Neumann-Morgenstern utility): An axiomatic extension of the ordinal concept of utility to uncertain payoffs. An agent possesses a von Neumann-Morgenstern utility function if she ranks uncertain payoffs according to (higher) expected value of her utility of the individual outcomes that may occur.

See also: rational (economic) behavior, uncertainty

Literature: Debreu (1964)

Entry by: Aner Sela and Joachim Winter

November 10, 1997
Direct questions and comments to: Glossary master