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People violate expected utility theory and this has been traditionally modeled by augmenting its weight-and-add framework by nonlinear transformations of values and probabilities. Yet individuals often use one-reason decision-making when making court decisions or choosing cellular phones, and institutions do the same when creating rules for traffic safety or fair play in sports. This chapter analyzes a model of one-reason decision-making, the priority heuristic, and show that it simultaneously implies common consequence effects, common ratio effects, reflection effects, and the fourfold pattern of risk attitude. The preferences represented by the priority heuristic satisfy some standard axioms. This work may provide the basis for a new look at bounded rationality.

Chapter 9 discusses the axiomatic version of expected utility theory (EUT), a theory of decision-making under risk, put forward by John von Neumann and Oskar Morgenstern in their book Theory of Games and Economic Behavior (1944). EUT was a changing factor in the history of utility measurement. In fact, while discussions of the measurability of utility before 1944 focused on the utility used to analyze decision-making between risk-free alternatives, after that year, discussions centered on the utility used to analyze decision-making between risky alternatives. In Theory of Games, the nature of the cardinal utility function u featured in von Neumann and Morgenstern’s EUT, and its relationship with the riskless utility function U of previous utility analysis remained ambiguous. Von Neumann and Morgenstern also put forward an axiomatic theory of measurement, which presents some similarities with Stanley Smith Stevens’s measurement theory but had no immediate impact on utility analysis.

Chapter 10 reconstructs the first part of the American debate on expected utility theory (EUT), which ranges from 1947, when the second edition of John von Neumann and Oskar Morgenstern’s Theory of Games was published, to April 1950. In this period, a number of eminent American economists, including Milton Friedman, Leonard J. Savage, Jacob Marschak, Paul Samuelson, and William Baumol, wrote papers in which they took stances on the validity of EUT and the nature of the cardinal utility function u featured in the expected utility formula. Friedman, Savage, and Marschak supported EUT, although for different reasons, while Samuelson and Baumol rejected it. Regarding the nature of the cardinal utility function u, however, they all shared the view that it is interchangeable with the utility function U that the earlier utility theorists had used to analyze choices between riskless alternatives.

Chapter 11 studies the second phase of the debate on expected utility theory (EUT), which commenced in May 1950, when Paul Samuelson, Leonard J. Savage, Jacob Marschak, Milton Friedman, and William Baumol initiated an intense exchange of letters. These economists argued about the exact assumptions underlying EUT, quarreled over whether these assumptions are compelling requisites for rational behavior under risk, and debated the nature of the cardinal utility function u featured in EUT. This correspondence modified the views of all five economists and transformed Samuelson into a supporter of EUT. In a prominent conference in Paris in May 1952, Friedman, Savage, Marschak, and Samuelson advocated EUT in the face of attacks from Maurice Allais and other opponents of the theory. The Paris conference and the publication of an Econometrica symposium on EUT in October 1952 marked the emergence of EUT as the mainstream economic model of decision-making under risk.

Chapter 13 discusses some laboratory experiments to measure the utility of money for individuals on the basis of their preferences between gambles where small amounts of money were at stake. The experiments were based on expected utility theory (EUT) and were conducted in the 1950s at Harvard and Stanford by three groups: statistician Frederick Mosteller and psychologist Philip Nogee (1951), philosophers Patrick Suppes and Donald Davidson with the collaboration of psychologist Sidney Siegel (1957), and Suppes and his student Karol Valpreda Walsh (1959). These scholars were confident about both EUT and the possibility of measuring utility through it. They designed their experiments so as to neutralize some psychological factors that could jeopardize the validity of EUT and spoil the significance of the experimental measurements of utility, and they concluded that their experimental findings supported both the experimental measurability of utility based on EUT and the descriptive validity of the theory.

Chapter 14 continues the history of the experimental attempts to measure utility by discussing two further experiments performed at Yale University in the early 1960s, one by Trenery Dolbear and the other by Jacob Marschak in association with Gordon Becker and Morris DeGroot. Like the experiments conducted in the 1950s, these were also based on expected utility theory (EUT) and aimed at measuring the utility of money of individuals on the basis of their preferences between gambles where small amounts of money were at stake. There are some differences in the designs of the experiments of the 1950s and those of the 1960s. Like the experimenters of the 1950s, however, Dolbear, Marschak, Becker, and DeGroot also confidently assessed their experimental findings as validating EUT: the theory was not 100 percent correct, but in an approximate sense, it appeared to be an acceptable descriptive theory of decision-making under risk.