Thinking and Deciding

236 NORMATIVE THEORY OF CHOICE UNDER UNCERTAINTY
Utility theory began in the seventeenth century, and its modern form began in
1738 (Bernoulli, 1954). Its development since that time was largely associated with
economic theory, where it became part of the descriptive theory of the behavior of
buyers and sellers in markets. Psychologists became interested in utility theory in the
early 1950s, soon after the publication of von Neumann and Morgenstern’s (1947)
Theory of Games and Economic Behavior. 2 In 1953, the economist Maurice Allais
argued that expected-utility theory fails as a descriptive model of decision making.
Allais — and many others to follow — also questioned the normative status of
the theory. Many scholars (especially economists, but also some psychologists and
philosophers) have been reluctant to admit that people sometimes behave irrationally
or that our intuitive judgments can be misleading, so they have tried to develop criteria
of rationality that are consistent with our behavior or our intuitions.
The years since 1953 have seen constant tension between the attackers and defenders
of expected-utility theory as normative. Both camps have engaged in efforts
to develop better descriptive models of decision making. The attackers, who assume
that people are generally rational, argue that better descriptive models will lead to
better normative models. The defenders, who acknowledge the existence of irrational
decision making, argue that the descriptive models will tell us where we fall
short according to the normative model and will allow us to ask what, if anything,
we can do about it. I take the view that our decisions are often irrational, and I shall
defend utility theory as a normative model. I shall also point out, however, that there
is room for various interpretations of utility theory as a normative model. The best
interpretation of utility theory is still an open question even for those who believe, as
I do, that the theory is essentially correct and that the descriptive violations of it are
biases. The problems are what to count as “utility.”
Utility is a number, but numbers have different roles. Is utility part of nature, in
the way that mass and acceleration are? Is it something we discover? Or is more
like something we make up, like the number of points in gin rummy? I think it
is in between. It is a tool that is useful in thinking about decision making, but it is
fundamentally an invention. In this regard, it is more like longitude, or time, than like
mass and acceleration. Longitude is a useful concept that we impose on the earth. We
could analyze our position differently, but any other way would be translatable into
this way. The earth did not come with lines on it. Utility is like longitude in another
way. The zero point is arbitrary. (We chose the Royal Observatory in Greenwich,
England.) And the units are arbitrary. We could have 360 degrees or 3, but once we
choose the zero point and the units, we have no more freedom.
The same is true of time. The calendar we use has an arbitrary zero point based
on the supposed birth year of Jesus Christ. Units like years, hours, and seconds on,
are also arbitrary (and do not work all that well together). The idea that we can
add, subtract, and multiply measures of time in a useful way is a consequence of a
mathematical model that we impose on the world, in which we conceive of time as
a continuum that can be described by real numbers. It leads to new ways of thinking
2 Edwards and Tversky (1967) reprint some important papers from this period.