The purpose of this chapter

The taxonomy presented in the previous chapter, and our vague nods to reduced-form utility functions, provide scant guidance for the practical choice and calibration of a utility function. We find that, in order to provide practical solutions, the best way is to understand where the ‘real’ problems are, and how these can be tackled. Somewhat paradoxically, this pragmatic interest naturally pushes us in this chapter towards a deeper analysis of the theoretical problems and limitations of ‘standard’ utility theory, and of the remedies that have been proposed to fix it. This detour into some foundational aspects of utility theory should be seen as a form of reculer pour mieux avancer.

‘Inside- and outside-the-theory’ objections

The literature on the paradoxical results that ‘traditional’ expected-utility theory can produce is vast and we do not intend to deal with this body of work in a systematic manner.

Some of these objections have been raised from ‘within the theoretical fold’, in the sense that they have prompted attempts to improve and fix the theory, rather than reject it. Other lines of criticism have called for the outright abandonment of the concept of utility theory (famously, if unkindly, referred to by Rabin and Thaler (2001) as Monty Python's ‘dead parrot’). We discuss briefly those critiques that have a direct bearing on our study.