ABSTRACT OF PAPER

Title: The Rise of Expected Utility Theory and the Rehabilitation of Cardinal Utility at Cowles, Chicago and MIT, 1948-1952
Author: Moscati Ivan


In the late 1930s and early 1940s, both expected utility theory (EUT) and cardinal utility occupied a peripheral position in mainstream economics. EUT was marginalized because a number of leading economists of the period judged implausible that individuals take into account only the average of utilities when they evaluate risky alternatives. Cardinal utility was dismissed using an Occam-razor argument: since all important results of utility and welfare analysis can be obtained on the basis of ordinal utility only, there is no need to use cardinal utility. The situation changed after the publication of von Neumann and Morgenstern’s book Theory of Games and Economic Behavior (1944). The book expounded an axiomatic version of EUT which featured a cardinal utility function. In the late 1940s and early 1950s, and especially between 1948 and 1952, von Neumann and Morgenstern’s EUT and the nature of the cardinal utility function featured in it became the focus of an intense debate. In the course of this debate EUT rose to prominence and around 1952 it established itself as the mainstream economic model for decisions under risk. The rise of EUT also led to a rehabilitation of the cardinal utility concept, which at that point appeared necessary for the analysis of risky behavior. Among the many contributions to the 1948-1952 discussions on von Neumann and Morgenstern’s utility analysis, in this paper I focus on those made in America by three groups of individuals associated with three different institutions: Marschak and some of his colleagues at the Cowles Commission, then located at the University of Chicago; Friedman and Savage, both faculty members of Chicago University but not associated with the Cowles Commission; and Samuelson, at MIT since 1940. I concentrate on Marschak, Friedman, Savage and Samuelson because, in different ways, they played a pivotal role in the rise of EUT and the rehabilitation of cardinal utility. In reconstructing the debate on EUT and cardinal utility at Cowles, Chicago and MIT, I use sources that apparently have not been utilized before, such as the Cowles Commission’s unpublished working papers and the correspondence between Samuelson, Savage, and Friedman.

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