Workbook for Volume 1 – Part II – Section #8: The “Number Magic” of “Expected Utility”
For new readers: Please read the “Pinned Post” at the top of this Substack’s Home Page, and titled Why Use Public Peer-Review to Write a Book? - “See for Yourself”.
For returning readers and subscribers: This post introduces the Revised Version for Volume 1 – Part II – Section #8: The “Number Magic” of “Expected Utility”
Summary:
Section #8: The “Number Magic” of “Expected Utility” - This section shows how the limitations of “Expected Value” as a decision-criterion led 17th & 18th Century gamblers to seek an alternative, leading to a “Maintenance Program” called “Expected Utility”. In the 40+ years after its formalization by Huygens, the use of “Expected Wealth” as a decision criterion for games of chance proved visibly divergent from actual playing experience, thus the “Expected Utility of Wealth” decision criterion came into existence as the first of several inside-the-box “Maintenance Programs” trying to match quantitative decision-making “Methods” with empirical observations. However, “Expected Utility of Wealth” represents an “Ensemble Average”, an 18th Century view of future value as a decision-making criterion to choose between gambles. Like Huygens’ “Expected Value”, Bernoulli’s “Expected Utility of Wealth” does not reflect accurate outcomes for making good individual, business, and investment decisions. Finally, this section shows how Ergodicity Economics brings us the long awaited, outside-the-box “Repair Program” for “Expected Utility” so that we can use it to make good individual, business, and investment decisions.
See the downloadable pdf below:
Developing…
”CTRI by Francois Gadenne” writes a business book in three volumes, published serially on Substack for public peer-review. The book connects the dots of life-enhancing practices for the next generation, free of controlling algorithms, based on the lifetime experience of a retirement age entrepreneur, & continuously updated with insights from reading Wealth, Health, & Statistics research papers on behalf of large companies as the co-founder of CTRI.