Decision-making in the presence of risk

Proposed in the 18th century by Cramer and Bernoulli and formally axiomatized in the 20th century by von Neumann and Morgenstern and others, the expected utility model has long been the dominant framework for the analysis of decision-making under risk. A growing body of experimental evidence, however, indicates that individuals systematically violate the key behavioral assumption of this model, the so-called independence axiom. This has led to the development and analysis of nonexpected utility models of decision-making. Although recent work in this area has shown that the analytical results of expected utility theory are more robust than previously supposed, other important issues remain unresolved.