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Expected-utility theory and its generalizations have provided economists with powerful tools to analyze problems involving uncertainty. As a result, the EU model has found applications in fields as diverse as agricultural economics, financial economics, and macroeconomics, along with nearly all areas of microeconomic analysis.

Choice Under Uncertainty

The outcomes of our actions commonly depend on uncertain factors outside our control. For example, a farmer choosing what crop to plant will get different returns depending on rainfall, frosts, pest infestations, and so on. The problem of uncertainty may be described in terms of the state-act-outcome model.

The state of nature, denoted as s, encompasses all the external factors described already. Typically we suppose that a choice under uncertainty begins with a consideration of the possible states of nature, ...

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