Subjective expected utility theory
DESCRIPTION
A theory of decision making under risk involving making choices among alternatives in order to maximize a decision maker’s subjective expected utility.
A theory of decision making under risk involving making choices among alternatives in order to maximize a decision maker’s subjective expected utility.
KEY INSIGHTS
Developed in pioneering research by Savage (1954), subjective expected utility theory views decision making under uncertainty in terms of two major subjectivities of an individual decision maker: the individual’s personal utility function and the individual’s personal probability analysis. In contrast to decision-making where objective probabilities can be established based on the relative frequencies of observable events, subjective probabilities are used in the decision-making process. The theory enables decision making to be characterized by the determination and use of such probabilities in combination with the decision maker’s subjective utility function to maximize the decision maker’s overall subjective expected utility.
Developed in pioneering research by Savage (1954), subjective expected utility theory views decision making under uncertainty in terms of two major subjectivities of an individual decision maker: the individual’s personal utility function and the individual’s personal probability analysis. In contrast to decision-making where objective probabilities can be established based on the relative frequencies of observable events, subjective probabilities are used in the decision-making process. The theory enables decision making to be characterized by the determination and use of such probabilities in combination with the decision maker’s subjective utility function to maximize the decision maker’s overall subjective expected utility.
KEYWORDS Decision making, uncertainty, subjective probability, subjective utility
IMPLICATIONS
Marketers concerned with the modeling of decision making under risk where probabilities are based on a decision maker’s beliefs, as opposed to being purely objective, may benefit from a greater understanding of subjective expected utility theory. In particular, where there is significant ambiguity involved in the decision-making process, as in strategic marketing decisions involving uncertain future events, the theoretical approach to modeling the decision may be beneficial to provide structure and rigor for greater clarity and consistency in the decision-making process.
Marketers concerned with the modeling of decision making under risk where probabilities are based on a decision maker’s beliefs, as opposed to being purely objective, may benefit from a greater understanding of subjective expected utility theory. In particular, where there is significant ambiguity involved in the decision-making process, as in strategic marketing decisions involving uncertain future events, the theoretical approach to modeling the decision may be beneficial to provide structure and rigor for greater clarity and consistency in the decision-making process.
APPLICATION AREAS AND FURTHER READINGS
Marketing Modeling
Kahn, Barbara E., and Sarin, Rakesh K. (1988). ‘Modeling Ambiguity in Decision Making under Uncertainty,’ Journal of Consumer Research, 15, September, 265–272.
Kahn, Barbara E., and Sarin, Rakesh K. (1988). ‘Modeling Ambiguity in Decision Making under Uncertainty,’ Journal of Consumer Research, 15, September, 265–272.
Lynch, J. J., and Cohen, J. L. (1982). ‘The Use of Subjective Expected Utility Theory as an Aid to Understanding Variables that Influence Helping Behavior,’ Journal of Personality and Social Psychology, 36(10), 1138–1151.
Eliashberg, Jehoshua (1980). ‘Consumer Preference Judgments: An Exposition with Empirical Applications,’ Management Science, 26(1), January, 60–77.
BIBLIOGRAPHY
Savage, Leonard J. (1954). The Foundations of Statistics. New York: John Wiley & Sons.
Savage, Leonard J. (1954). The Foundations of Statistics. New York: John Wiley & Sons.