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This Element offers an accessible but technically detailed review of expected utility theory (EU), which is a model of individual decision-making under uncertainty that is central for both economics and philosophy. The Element's approach falls between the history of ideas and economic methodology. At the historical level, it reviews EU by following its conceptual evolution from its original formulation in the eighteenth century through its transformations and extensions in the mid-twentieth century to its more recent supersession by post-EU theories such as prospect theory. In reconstructing the history of EU, it focuses on the methodological issues that have accompanied its evolution, such as whether the utility function and the other components of EU correspond to actual mental entities. On many of these issues, no consensus has yet been reached, and in this Element the author offers his view on them.

AbstractIn 1961 Daniel Ellsberg published an article titled "Risk, Ambiguity, and the Savage Axioms" in the Quarterly Journal of Economics, which became a seminal contribution to the theory of decision-making under uncertainty. This paper analyzes Ellsberg's 1961 classic, situates it within the context of decision-making theory in the 1950s and early 1960s and within the development of Ellsberg's ideas, and provides an overview of the experimental and theoretical literature to which it gave rise.

The article studies the origin, content, and impact of two experiments to measure the utility of money, one by Frederick Mosteller and Philip Nogee in 1948–49 and one by Donald Davidson, Patrick Suppes, and Sidney Siegel in 1954. Both experiments relied on expected utility theory (EUT), and both groups of experimenters concluded that their findings supported the measurability of utility as well as EUT. The two experiments illuminate the interaction between economics and psychology in the 1940s and 1950s in several ways. First, their designs exhibit a tension between the economic image of human agency associated with EUT and insights from experimental psychology research at odds with EUT. Second, both experiments were performed by psychologists and other non-economists, and the article reconstructs how their authors became interested in measuring an archetypal economic object such as the utility of money. Finally, the article shows that the psychological insights shaping the two experiments found some further application between 1955 and 1965, but were quickly forgotten. Only in the 1970s, when robust experimental evidence against EUT accumulated, were economists compelled to reconsider those psychological insights.

This article argues that the canonical dichotomy between cardinal utility and ordinal utility is inadequate to tell an accurate history of utility theory, and that a third form of utility consistent with the so-called classical understanding of measurement should be added to the traditional picture. According to the classical view, measuring an object consists of assessing the numerical ratio between the object and some other object taken as a unit. In particular, we show that Jevons, Menger, and Walras understood measurement in the classical sense and applied this understanding to utility measurement; therefore, they were not cardinalists in the current sense of the term, which is associated with the ranking of utility differences. We also analyze the argumentative strategies adopted by Jevons and Walras to address the conflict between the scientific importance they attributed to measurement, their classical understanding of it, and the apparent immeasurability of the utility featuring in their economic theories. Finally, in order to appreciate the broad intellectual context within which their discussions on utility measurement took place, this article reviews the understanding of measurement in disciplines that bear some relation to utility theory. The review illustrates that in the years 1870-1910, the period in which Jevons, Menger, and Walras were active, the classical understanding of measurement dominated not only utility theory but also all other disciplines surveyed. This circumstance helps to explain why the three marginalists remained committed to the classical understanding even though it did not square with their economic practices.