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Retrospectives: How Economists Came to Accept Expected Utility Theory: The Case of Samuelson and Savage

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  • Ivan Moscati

Abstract

Expected utility theory dominated the economic analysis of individual decision-making under risk from the early 1950s to the 1990. Among the early supporters of the expected utility hypothesis in the von Neumann–Morgenstern version were Milton Friedman and Leonard Jimmie Savage, both based at the University of Chicago, and Jacob Marschak, a leading member of the Cowles Commission for Research in Economics. Paul Samuelson of MIT was initially a severe critic of expected utility theory. Between mid-April and early May 1950, Samuelson composed three papers in which he attacked von Neumann and Morgenstern's axiomatic system. By 1952, however, Samuelson had somewhat unexpectedly become a resolute supporter of the expected utility hypothesis. Why did Samuelson change his mind? Based on the correspondence between Samuelson, Savage, Marschak, and Friedman, this article reconstructs the joint intellectual journey that led Samuelson to accept expected utility theory and Savage to revise his motivations for supporting it.

Suggested Citation

  • Ivan Moscati, 2016. "Retrospectives: How Economists Came to Accept Expected Utility Theory: The Case of Samuelson and Savage," Journal of Economic Perspectives, American Economic Association, vol. 30(2), pages 219-236, Spring.
  • Handle: RePEc:aea:jecper:v:30:y:2016:i:2:p:219-36 Note: DOI: 10.1257/jep.30.2.219
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    References listed on IDEAS

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    1. Sophie Jallais & Pierre-Charles Pradier, 2005. "The Allais Paradox and its Immediate Consequences for Expected Utility Theory," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00311396, HAL.
    2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    3. Samuelson, Paul A., 1950. "Probability And The Attempts To Measure Utility (English & Japanese)," Economic Review, Hitotsubashi University, vol. 1(3), pages 174-180, July.
    4. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    5. Milton Friedman & L. J. Savage, 1952. "The Expected-Utility Hypothesis and the Measurability of Utility," Journal of Political Economy, University of Chicago Press, vol. 60, pages 463-463.
    6. Paul A. Samuelson, 1942. "Fiscal Policy and Income Determination," The Quarterly Journal of Economics, Oxford University Press, vol. 56(4), pages 575-605.
    7. Paul A. Samuelson, 1966. "A Summing Up," The Quarterly Journal of Economics, Oxford University Press, vol. 80(4), pages 568-583.
    8. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
    9. Philippe Mongin, 2014. "Le paradoxe d'Allais. Comment lui rendre sa signification perdue ?," Revue économique, Presses de Sciences-Po, vol. 65(5), pages 743-779.
    10. Bertrand R. Munier, 1991. "Nobel Laureate: The Many Other Allais Paradoxes," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 179-199, Spring.
    11. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    12. Gerhard Tintner, 1942. "A Contribution to the Non-Static Theory of Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 56(2), pages 274-306.
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    Citations

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    Cited by:

    1. Jean Baccelli & Philippe Mongin, 2016. "Choice-Based Cardinal Utility: a tribute to Patrick Suppes," Post-Print hal-01462299, HAL.
    2. Han Bleichrodt & Chen Li & Ivan Moscati & Peter P. Wakker, 2016. "Nash was a first to axiomatize expected utility," Theory and Decision, Springer, vol. 81(3), pages 309-312, September.
    3. Garth Heutel, 2017. "Prospect Theory and Energy Efficiency," NBER Working Papers 23692, National Bureau of Economic Research, Inc.
    4. Schilirò, Daniele, 2017. "Economics versus psychology.Risk, uncertainty and the expected utility theory," MPRA Paper 83366, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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