Abstract

When students first study expected utility, they are inclined to interpret it as a theory that explains preferences for lotteries in terms of preferences for outcomes. Knowing U($100) and U($0), the agent can calculate that the utility of a gamble of $100 on a fair coin coming up heads is U($100)/2 + U($0)/2. Utilities are indices representing preferences, so in calculating the utility of the gamble, one is apparently giving a causal explanation for the agent’s preference for the gamble.