The Harmfulness of the EU Theory
7 Pages Posted: 6 Jun 2011
Date Written: May 1, 2011
Abstract
Despite many evidences of contradiction, the EU theory is still widely used as a convenient tool. This paper proves that the EU theory is harmful, in that people will lose a lot of money by following its decision rules. Some Monte Carlo simulations are conducted to rule out the possibility of exception. While the law of large numbers is the base to disprove the EU theory, this paper also warns of its confusion with the law of large value. Another possible misuse of the law in connection with the pari-mutual betting system is also explained.
Keywords: Expected Utility, Law of Large Numbers, Pari-mutual Betting, Central Limit Theorem
JEL Classification: C11, G01, G22
Suggested Citation: Suggested Citation
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