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What is the definition/formula for Expected Value/Utility?
Summation of P(outcome) * Payout/Utility.
What is the St. Petersburg paradox?
For a coin flip that offers 2^n payout per flip, one should pay an unlimited amount to play because the payout is infinite.
What is utility?
How âgood'â or âbadâ an outcome is.
What does diminishing marginal utility entail?
The more one has of something (like money), gaining more of that thing (money), decreases the util gains from subsequent gains.
Have $2000=2000 utils; numbers past 2000 will no longer follow a 1:1 ratio.
What is the axiom of completeness?
For any x or y, there is a either a preference of:
x to y
y to x
or indifference
What is the axiom of transivity?
If there is a preference of x to y, and a preference of y to z, then the preference follows of x over z.
What is the axiom of independence?
If there is a preference of x to y, adding z wonât change the preference.
What is the axiom of continuity?
If there is a preference of x to y, & y to z, then a combination of x and z can equal y.
pX + (1-p)Z = y
How is the axiom of independence violated?
With the Allies paradox.
How is the axiom of transitiveness violated?
When there is a small set of changes that add up to the large changes that one would normally reject.
What is the framing effect?
Outcomes described as a gain/loss result in people make different choices (usually favoring the gain)
What is the certainty effect?
Tendency to overweight and/or prefer/avoid guaranteed outcomes.