Making simple decisions

Simple decisions can be made quickly and easily, with little effort or analysis. Simple decisions typically involve a limited set of options and criteria, and the outcomes and consequences of each option are known and easy to understand. However, even simple decisions can be suboptimal. Toward making the best possible decisions, in this unit, we introduce the ideas of utility functions and utility maximization:

• Utility functions is a mathematical expression representing an individual’s preferences over different choices or outcomes. It assigns a numerical value, called “utility,” to each possible choice or outcome based on how much the individual values it. A utility function is subjective and can vary from person to person, as different individuals may have different preferences.

• Utility maximization is the process of choosing the option, or set of options, that provides the highest level of utility subject to various types of constraints, given a set of available options and the individual’s preferences. It involves evaluating each option using the utility function and selecting the one that maximizes the utility.