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Measuring UtilityFrom the Marginal Revolution to Behavioral Economics$
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Ivan Moscati

Print publication date: 2018

Print ISBN-13: 9780199372768

Published to Oxford Scholarship Online: December 2018

DOI: 10.1093/oso/9780199372768.001.0001

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Conventions, Operations, Predictions

Conventions, Operations, Predictions

Redefining Utility Measurement, 1952–1955

Chapter:
(p.193) chapter 12 Conventions, Operations, Predictions
Source:
Measuring Utility
Author(s):

Ivan Moscati

Publisher:
Oxford University Press
DOI:10.1093/oso/9780199372768.003.0013

Chapter 12 analyzes the third phase of the debate on expected utility theory, from the end of 1952 to 1955. The issues concerning the nature of utility measurement gained an autonomous status in this phase. Milton Friedman, Leonard J. Savage, Robert Strotz, Armen Alchian, and Daniel Ellsberg argued that measuring utility consists of assigning numbers to objects by following a definite set of operations. While the particular way of assigning utility numbers to objects is largely arbitrary and conventional, the assigned numbers should allow economists to predict individuals’ choice behavior. This is similar to the operational conception advanced by psychologist Stanley Smith Stevens and definitively liberates utility measurement from its remaining ties with units and ratios. The novel view of measurement quickly became standard among mainstream utility theorists, and its success helps explain the peaceful cohabitation of cardinal and ordinal utility within utility analysis that began in the mid-1950s.

Keywords:   Milton Friedman, Leonard J. Savage, Robert Strotz, Armen Alchian, conventional utility measurement, Daniel Ellsberg, operational utility measurement, two utility functions, choice behavior prediction, as-if methodology

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