Rational Management of Risks

Abstract

Abstract The literature on expected utility formulates in two ways the principle to maximize expected utility. One version of the principle requires choices that literally maximize expected utility. The other version requires choices that are “as if” maximizing expected utility. The first principle is substantive and applies to a single choice. The second principle is representational and applies to a set of choices; it requires only a type of consistency among choices and is weaker than the first, substantive principle. The justification of the substantive version of the principle is that following it amounts to following preferences among the options in a decision problem. The justification takes an option’s risk as a consequence of the option’s realization. Making this move yields a simple decision principle, using evaluations of options that do not add weights to the probabilities or the utilities of an option’s possible outcomes.

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