When I teach decision analysis, I don’t use the word “utility” for exactly this reason. I separate the “value model” from the “u-curve.”
The value model is what translates all the possible outcomes of the world into a number representing value. For example, a business decision analysis might have inputs like volume, price, margin, development costs, etc., and the value model would translate all of those into NPV.
You only use the u-curve when uncertainty is involved. For example, distributions on the inputs lead to a distribution on NPV, and the u-curve would determine how to assign a value that represents the distribution. Some companies are more risk averse than others, so they would value the same distribution on NPV differently.
Without a u-curve, you can’t make decisions under uncertainty. If all you have is a value model, then you can’t decide e.g. if you would like a deal with a 50-50 shot at winning $100 vs losing $50. That depends on risk aversion, which is encoded into a u-curve, not a value model.
When I teach decision analysis, I don’t use the word “utility” for exactly this reason. I separate the “value model” from the “u-curve.”
The value model is what translates all the possible outcomes of the world into a number representing value. For example, a business decision analysis might have inputs like volume, price, margin, development costs, etc., and the value model would translate all of those into NPV.
You only use the u-curve when uncertainty is involved. For example, distributions on the inputs lead to a distribution on NPV, and the u-curve would determine how to assign a value that represents the distribution. Some companies are more risk averse than others, so they would value the same distribution on NPV differently.
Without a u-curve, you can’t make decisions under uncertainty. If all you have is a value model, then you can’t decide e.g. if you would like a deal with a 50-50 shot at winning $100 vs losing $50. That depends on risk aversion, which is encoded into a u-curve, not a value model.
Does this make sense?
Totally. ;)