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**DA 6. Multiattribute Utility Theory
**

George E. Apostolakis Massachusetts Institute of Technology

Spring 2007

DA 6. Multiattribute Utility Theory

1

xN). Multiattribute Utility Theory 2 . DA 6. • In general.Consequences • Not all the consequences are monetary. the consequences are described by a vector x ≡ (x1. …. for example. they may include the impact on health and safety of groups of stakeholders. • In risk management problems.

Multiattribute Utility Theory 3 .. xN) • Decision alternative Ai is preferred over alternative Ak if and only if its expected utility is greater. ….e. i. Ei[u] > Ek[u] ⇔ Ai f Ak DA 6.Multiattribute Utility • u(x1.

...... xN) Use the certainty-equivalent approach: p * ( x* . x N* ) 1 ( x1 .. …... x 1 N) 1-p ( x1* . Multiattribute Utility Theory .. x N ) 4 DA 6..Finding u(x1..

Multiattribute Utility Theory 5 . …. xN) = f[u1(x1). uN(xN)] where ui(xi) is the utility function of attribute xi? • The answer is “yes. • Can we find a function f such that u(x1.” if we can establish “independence” among the attributes.Independence Assumptions • Finding the multiattribute utility function using the preceding method is very burdensome. DA 6. … .

z ) f (y' . (y. z ) ∀z where y and y’ are two levels of y.e. if preferences for y levels do not depend on the level of z. z ) 0 ' 0 implies (y. DA 6. Multiattribute Utility Theory 6 ..Mutual Preferential Independence • Attribute Y is preferentially independent of attribute Z. i. z ) f (y .

• If you prefer “afternoon” to “morning” departure regardless of the price of the ticket. $500) • If you prefer “afternoon” to “morning” departure regardless of the price of the ticket. then Y and Z are mutually preferentially independent. DA 6. Multiattribute Utility Theory 7 . afternoon) • Z: Ticket cost ($300. and you prefer $300 to $500 regardless of the departure time. then Y is preferentially independent of Z. but the price depends on when you leave. but they are not mutually preferentially independent.Mutual Preferential Independence: Example • Y: Departure time (morning.

• For the previous example: The preference value of the lottery L(morning. except that the assessments are made with uncertainty present.Utility Independence (1) • It is similar to preferential independence. 0. • The CEs of lotteries on Y levels are independent of z. afternoon.5. 0. Multiattribute Utility Theory 8 .5) is independent of the price of the ticket. • Y is utility independent of Z if preferences over lotteries involving different levels of Y do not depend on a fixed level of Z. DA 6. It is a stronger assumption.

2 9 0 ≤ ui ( xi ) ≤ 1 DA 6. is u(x1. x2) = = k1 u1(x1) + k2 u2(x2) + (1.k1.k2) u1(x1) u2(x2) with 0 ≤ ki ≤ 1 i = 1. Multiattribute Utility Theory .2 i = 1.Utility Independence (2) • A form of the utility function for attributes X1 and X2 that are utility independent.

Utility Independence (3) • Fix the level of X2 at x'2 .k1.k2) u1(x1) u2( 2) ' ' x x =[k1+ (1. x'2 ) = ' ' x x =k1 u1(x1) + k2 u2( 2 ) + (1. ⇒ • Lotteries on X1 are independent of the level of X2. the preferences over levels of X1 are independent of the level of X2. DA 6.k2) u2( 2 )] u1(x1) + k2 u2( 2 ) • This is a linear transformation of u1(x1). • For another level of X2. therefore. then u(x1. we will get another linear transformation of u1(x1). Multiattribute Utility Theory 10 .k1.

they are mutually utility independent. • u(x1. x2) = g(x1) + h(x1)u2(x2) • X2 is utility independent of X1 but not vice versa. Multiattribute Utility Theory 11 . DA 6.Utility Independence (4) • When X1 and X2 are utility independent of each other.

Additive Independence • A stronger assumption than utility independence. • For two attributes. Multiattribute Utility Theory 12 . DA 6. x2 ) ' x1 and x1 are different levels of x1 We can get any pair of consequences with probability 0. x 2 ) 1/2 ( x1 .5. we must be indifferent between 1/2 ( x1 . the only difference is how the levels are combined. x'2 ) 1/2 ' ( x1 . x'2 ) 1/2 ' ( x1 .

Multiattribute Utility Theory 13 . x2) = k u1(x1) + (1-k) u2(x2) DA 6.Additive Utility Function u( x ) = ∑ k i u i ( x i ) 1 N where 0 ≤ ki ≤ 1 ∑ki = 1 1 N 0 ≤ ui ( xi ) ≤ 1 Two attributes: u(x1.

it should not matter what the other attribute’s level is. • For cases with no or little uncertainty. • Interaction among the attributes is not allowed. DA 6. • For complex problems. it could be a useful first-cut approximation. additive independence represents reasonably well people’s utilities.Additive Independence: Implications • When we assess the utility of one attribute. Multiattribute Utility Theory 14 .

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