0. Utilities and decision theory
Lirong Xia
Friday, Feb 28, 2014

1. Reminder Midterm Mar 7 Project 2 deadline Mar 18 midnight in-class
open book and lecture notes
simple calculators are allowed
cannot use smartphone/laptops/wifi
practice exams and solutions (check piazza)
Project 2 deadline Mar 18 midnight

2. Checking conditional independence from BN graph
Given random variables Z1,…Zp, we are asked whether X⊥Y|Z1,…Zp
dependent if there exists a path where all triples are active
independent if for each path, there exists an inactive triple

3. General method for variable elimination
Compute a marginal probability p(x1,…,xp) in a Bayesian network
Let Y1,…,Yk denote the remaining variables
Step 1: fix an order over the Y’s (wlog Y1>…>Yk)
Step 2: rewrite the summation as
Σy Σy …Σyk Σykanything
Step 3: variable elimination from right to left
sth only
involving X’s
sth only involving Y1 and X’s
sth only involving Y1, Y2,…,Yk-1 and X’s
sth only involving Y1, Y2 and X’s

4. Today Utility theory expected utility: preferences over lotteries
maximum expected utility (MEU) principle

5. Expectimax Search Trees
Max nodes (we) as in minimax search
Chance nodes
Need to compute chance node values as expected utilities
Next class we will formalize the underlying problem as a Markov decision Process

6. Expectimax Pseudocode
Def value(s):
If s is a max node return maxValue(s)
If s is a chance node return expValue(s)
If s is a terminal node return evaluations(s)
Def maxValue(s):
values = [value(s’) for s’ in successors(s)]
return max(values)
Def expValue(s):
weights = [probability(s, s’) for s’ in successors(s)]
return expectation(values, weights)
Next agent 应该是指父亲节点。。。

7. Expectimax Quantities

8. Maximum expected utility
Why should we average utilities? Why not minimax?
Principle of maximum expected utility:
A rational agent should chose the action which maximizes its expected utility, given its (probabilistic) knowledge
Questions:
Where do utilities come from?
How do we know such utilities even exist?
Why are we taking expectations of utilities (not, e.g. minimax)?
What if our behavior can’t be described by utilities?

9. Inference with Bayes’ Rule
Example: diagnostic probability from causal probability:
Example:
F is fire, {f, ¬f}
A is the alarm, {a, ¬a}
Note: posterior probability of fire still very small
Note: you should still run when hearing an alarm! Why?
p(f)=0.01
p(a)=0.1
p(a|f)=0.9

10. 0.009
stay
0.991
100%
run out

11. Utilities
Utilities are functions from outcomes (states of the world, sample space) to real numbers that represent an agent’s preferences
Where do utilities come from?
In a game, may be simple (+1/-1)
Utilities summarize the agent’s goals
-10100
100
-100

12. Preferences over lotteries
An agent chooses among:
Prizes: A, B, etc.
Lotteries: situations with uncertain prizes
Notation: A p L
1-p B
A is strictly preferred to B
In difference between A and B
A is strictly preferred to or indifferent with B

13. Encoding preferences over lotteries
How many lotteries?
infinite!
Need to find a compact representation
Maximum expected utility (MEU) principle
which type of preferences (rankings over lotteries) can be represented by MEU?

14. Rational Preferences
We want some constraints on preferences before we call them rational
For example: an agent with intransitive preferences can be induced to give away all of its money
If B>C, then an agent with C would pay (say) 1 cent to get B
If A>B, then an agent with B would pay (say) 1 cent to get A
If C>A, then an agent with A would pay (say) 1 cent to get C

15. Rational Preferences
Preference of a rational agent must obey constraints
The axioms of rationality: for all lotteries A, B, C
Orderability
Transitivity
Continuity
Substitutability
Monotonicity
Theorem: rational preferences imply behavior describable as maximization of expected utility

16. MEU Principle Maximum expected utility (MEU) principle: Theorem:
[Ramsey, 1931; von Neumann & Morgenstern, 1944]
Given any preference satisfying these axioms, there exists a real-value function U such that:
Maximum expected utility (MEU) principle:
Choose the action that maximizes expected utility
Utilities are just a representation!
an agent can be entirely rational (consistent with MEU) without ever representing or manipulating utilities and probabilities
Utilities are NOT money

17. What would you do?
-10100
0.009
stay
0.991
100
100%
run out
-100

18. Common types of utilities

19. Utility theory in Economics
State of the world: money you earn
Money does not behave as a utility function, but we can talk about the utility of having money (or being in debt)
Which would you prefer?
A lottery ticket that pays out $10 with probability .5 and $0 otherwise, or
A lottery ticket that pays out $3 with probability 1
How about:
A lottery ticket that pays out $100,000,000 with probability .5 and $0 otherwise, or
A lottery ticket that pays out $30,000,000 with probability 1
Usually, people do not simply go by expected value

20. Risk attitudes
An agent is risk-neutral if she only cares about the expected value of the lottery ticket
An agent is risk-averse if she always prefers the expected value of the lottery ticket to the lottery ticket
Most people are like this
An agent is risk-seeking if she always prefers the lottery ticket to the expected value of the lottery ticket

21. Decreasing marginal utility
Typically, at some point, having an extra dollar does not make people much happier (decreasing marginal utility)
utility
buy a nicer car (utility = 3)
buy a car (utility = 2)
buy a bike (utility = 1)
money
$200
$1500
$5000

22. Maximizing expected utility
buy a nicer car (utility = 3)
buy a car (utility = 2)
buy a bike (utility = 1)
money
$200
$1500
$5000
Lottery 1: get $1500 with probability 1
gives expected utility 2
Lottery 2: get $5000 with probability .4, $200 otherwise
gives expected utility .4*3 + .6*1 = 1.8
(expected amount of money = .4*$ *$200 = $2120 > $1500)
So: maximizing expected utility is consistent with risk aversion

23. Different possible risk attitudes under expected utility maximization
money
Green has decreasing marginal utility → risk-averse
Blue has constant marginal utility → risk-neutral
Red has increasing marginal utility → risk-seeking
Grey’s marginal utility is sometimes increasing, sometimes decreasing → neither risk-averse (everywhere) nor risk-seeking (everywhere)

24. Example: Insurance Consider the lottery [0.5, $1000; 0.5, $0]
What is its expected monetary value (EMV)? ($500)
What is its certainty equivalent?
Monetary value acceptable in lieu of lottery
$400 for most people
Difference of $100 is the insurance premium
There is an insurance industry because people will pay to reduce their risk
If everyone were risk-neutral, no insurance needed!

25. Example: Insurance
Because people ascribe different utilities to different amounts of money, insurance agreements can increase both parties’ expected utility
You own a car. Your lottery:
LY = [0.8, $0; 0.2, -$200]
i.e., 20% chance of crashing
You do not want -$200!
Insurance is $50
UY(LY) = 0.2*UY(-$200)=-200
UY(-$50)=-150
Amount
Your Utility UY $0
-$50
-150
-$200
-1000

26. Example: Insurance
Because people ascribe different utilities to different amounts of money, insurance agreements can increase both parties’ expected utility
You own a car. Your lottery:
LY = [0.8, $0; 0.2, -$200]
i.e., 20% chance of crashing
You do not want -$200!
UY(LY) = 0.2*UY(-$200)=-200
UY(-$50)=-150
Insurance company buys risk:
LI = [0.8, $50; 0.2, -$150]
i.e., $50 revenue + your LY
Insurer is risk-neutral:
U(L) = U(EMV(L))
UI(LI) = U(0.8*50+0.2*(-150))
= U($10) >U($0)

27. Acting optimally over time
Finite number of periods:
Overall utility = sum of rewards in individual periods
Infinite number of periods:
… are we just going to add up the rewards over infinitely many periods?
Always get infinity!
(Limit of) average payoff: limn→∞Σ1≤t≤nr(t)/n
Limit may not exist…
Discounted payoff: Σtϒt r(t) for some ϒ < 1
Interpretations of discounting:
Interest rate r: ϒ= 1/(1+r)
World ends with some probability 1-ϒ
Discounting is mathematically convenient
We will see more in the next class