American Economic Association

Bayesian Decision Theory and Utilitarian Ethics

Author(s): John C. Harsanyi
Source: The American Economic Review, Vol. 68, No. 2, Papers and Proceedings of the
Ninetieth Annual Meeting of the American Economic Association (May, 1978), pp. 223-228
Published by: American Economic Association
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 Bayesian Decision Theory and Utilitarian Ethics
By JOHN
One of the great intellectual achievements
of the twentieth century is the Bayesian
theory of rational behavior under risk and
uncertainty. Many economists, however, are
still unaware of how strong the case really is
for Bayesian theory, and many more fail to
appreciate the far-reaching implications the
Bayesian concept of rationality has for
ethics and welfare economics. The purpose
of this paper is to argue that the Bayesian
rationality postulates are absolutely ines-
capable criteria of rationality for policy de-
cisions; and to point out that these Bayesian
rationality postulates, together with a
hardly controversial Pareto optimality re-
quirement, entail utilitarian ethics as a mat-
ter of mathematical necessity.
1. The BayesianRationalityPostulates
In discussing the criteria for rational be-
havior, I will distinguish behavior under
certainty, under risk, and under uncer-
tainty. Certainty obtains when we can pre-
dict the actual outcome of any action we
can take. Risk obtains when we know at
least the objective probabilities associated
with alternative possible outcomes. Finally,
uncertainty obtains when even these ob-
jective probabilities are partly or wholly
unknown to us (or are possibly even unde-
fined).
In the case of certainty, I will assume that
each individual chooses among various
alternative situations, where each situation
is characterized by finitely many economic
and noneconomic variables, such as his
holdings of different commodities, includ-
ing money, his health, his social position,
his social relationships, etc., as well as by
*Professor of business administration and of eco-
nomics, University of California-Berkeley. I wish to
thank the National Science Foundation for supporting
this research through grant SOC77-06394 to the Center
for Research in Management Science, University of
California-Berkeley.
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C. HARSANYI*
similar economic and noneconomic vari-
ables affecting other individuals in the
society. Thus, mathematically, any situation
can be regarded as a point in a finite-dimen-
sional (say, r-dimensional) Euclidean space
E'r
In the case of risk and of uncertainty, an
individual's choices can be modeled as
choices among different lotteries whose
"prizes" are situations, that is, points in E'.
A lottery can be described as
L = (AI I|el . ** Ak I ek, . AK
(1) I eK)
indicating that this lottery L will yield
prizes A1... AK, depending on which one
of K mutually exclusive and exhaustive
events el, ... eK occurs. These events el,
* . eK will be called conditioning events.
Mathematically, any event ek (k = 1 ... ,
K) can be regarded as a measurable subset
of the space S2of all possible "states of the
world." A lottery L will be called a risky or
an uncertain lottery, depending on whether
the decision maker does or does not know
the objective probability Pk = Prob (ek)
associated with every event ek (k = 1.
K) used in this lottery L.
In analyzing the behavior of any indi-
vidual i (i = 1 ... n), strict preference by
him will be denoted by >i and nonstrict
preference including indifference, or equiv-
alence, by >?i
Rational behavior by a given individual i
under certainty can be characterized by two
rationality postulates:
1. Complete preordering. The nonstrict
preferences of this individual i establish a
complete preordering over the space E' of
all possible situations (or over some suitable
closed subset of Er).
2. Continuity. Suppose that the sequence
Al, A2 ... . of situations converges to a
particular situation AO, and that another
sequence B1, B2 .. - of situations con-
verges to Bo, with Ak >i Bk for all k. Then,
AO >i BO.
223
224 AMERICAN ECONOMIC ASSOCIATION
For convenience I will call these two pos-
tulates the basic utility axioms. Using these
two axioms, we can characterize rational
behavior as follows.
THEOREM 1: Utility Maximization. If an
individual'spreferences satisfy the two basic
utility axioms, then his behavior will be equiv-
alent to maximizing a well-defined (ordinal)
utility function.' (For proof, see Gerard
Debreu, pp. 55-59.)
To characterize rational behavior under
risk and under uncertainty, we need two
additional rationality postulates:
3. Probabilistic equivalence. Let
L tions.
(2) = (AI eI ... SAK I eK)
and
L* = (A e
... AKe)
and suppose that the decision maker knows
the objective probabilities associated with
events e, . eK as well as with events
e* ... IeK and knows that these probabili-
ties satisfy
(3) Prob(ek) = Prob(e,*)
for k = 1 . . . K
Then he will be indifferent between lotteries
L and L*.
In other words, a rational individual will
be indifferent between two risky lotteries if
these yield him the same prizes with the
same probabilities even if the two lotteries
use quite different physical processes to gen-
erate these possibilities. Note that this pos-
tulate implies von Neumann and Morgen-
stern's postulate on compound lotteries:
that a rational individual will be in-
different between a two-stage lottery and a
one-stage lottery if both offer the same
prizes with the same probabilities.
IFor some purposes it may be desirable to define
rational behavior without requiring that it should sat-
isfy the continuity postulate (postulate 2). It can be
shown that if a given individual's preferences satisfy at
least the complete preordering postulate (postulate 1),
then his behavior will be equivalent to lexicographi-
cally maximizing a certain utility vector.
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MA Y 1978
4. Sure-thing principle. Suppose that
A* >i Ak fork = 1, ...,K. Then
(4) (A* Iel,..,AK eK)
>i (AI I el, -,_AK I eK)
In other words, other things being equal, a
rational individual will not prefer a lottery
yielding less desirable prizes over a lottery
yielding more desirable prizes. Note that
the sure-thing principle is essentially identi-
cal with the game-theoretical principle that
a rational individual will avoid using any
(weakly or strongly) dominated strategy.
Obviously, both postulates 3 and 4 are
extremely compelling rationality require-
ments. But they are subject to two qualifica-
(i) Both postulates presuppose that the
utility U(A4k) of any prize Ak iS independent
of its conditioning event ek. This require-
ment can always be satisfied by suitable
definition of the prizes. For example, the
utility of an umbrella depends on whether
it is raining or not (and whether there is a
heavy rain or a light rain). Therefore, it
would be inappropriate to make an um-
brella a prize of a lottery when the nature of
the weather is the conditioning event;
rather, we must redefine the prize as staying
dry, or as getting slightly wet, or as getting
very wet since, as a rule, the utilities asso-
ciated with these prizes can be assessed
without knowing the weather, etc.
(ii) More importantly, both postulates
(and especially postulate 3) presuppose that
the decision maker has no specific utility or
disutility for gambling as such, that is, for
the nervous tension and the other psycho-
logical experiences directly connected with
gambling. In other words, the -two postu-
lates assume that the decision maker will
take a purely result-oriented attitude toward
lotteries, and will derive all his utility and
disutility from the prizes he may or may not
win through these lotteries, rather than
from the act of gambling itself.
Clearly, this assumption is seldom, if
ever, satisfied in the case of gambling done
primarily for entertainment. For example,
people who gamble in a casino will usually
do this because they are attracted by the
 VOL 68 NO. 2 ECONOMICS AND ETHICS
nervous tension associated with gambling;
and since the latter may strongly depend on
the details of the physical process used to
produce the relevant probabilities, they may
be far from indifferent to the nature of this
physical process. (For example, they may
not at all be indifferent between participat-
ing in a one-stage lottery and participating
in a probabilistically equivalent two-stage
lottery.)
On the other hand, it is natural to expect
that, in making important policy decisions,
responsible decision makers will take a re-
sult-oriented attitude toward risk taking.
This is probably a reasonably realistic de-
scriptive prediction; and it is certainly an
obvious normative rationality requirement
as well as a moral requirement: responsible
business executives using their shareholders'
money, and responsible political leaders
acting on behalf of their constituents, are
expected to do their utmost to achieve the
best possible results, rather than to gratify
their own personal desire for nervous ten-
sion (or for avoiding nervous tension). Even
clearer is the obligation of taking a purely
result-oriented attitude in making impor-
tant moral decisions.
Thus, we can conclude that while postu-
lates 3 and 4 have little application to gam-
bling done for entertainment, they are very
basic rationality requirements for all serious
policy decisions as well as for personal
moral decisions.
11. Expected-UtilityMaximization
The main conclusion of Bayesian theory
is that a rational decision maker under risk
and under uncertainty will act in such a way
as to maximize his expected utility; or,
equivalently, that he will assess the utility of
any lottery to him as being equal to its ex-
pected utility (expected-utility theorem).
Different authors have used different
axioms to derive this theorem, and some of
these axioms had somewhat questionable
intuitive plausibility.2 It can be shown, how-
2For example, Leonard Savagc's Postulate 4 directly
assumcs that the decision makcr will act on the basis
of consistent qualitative subjective probabilities (i.e., he
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225
ever, that for deriving the theorem, all we
need, apart from the two basic probability
axioms, are the probabilistic equivalence
postulate and the sure-thing principle, both
of which represent absolutely compelling
rationality requirements for serious policy
decisions.
THEOREM 2: Expected-Utility. If an indi-
vidual'spreferences satisfy postulates 1, 2, 3,
and 4, then he will have a (cardinal) utility
function Ui such that assigns, to any lottery L
ofform (1), a utility equal to its expected
utility, that is, equal to the quantity
K
(5) Ui(L) = EPk Ui(Ak
k= I
where Pk (k - 1,...,K) is the probability
associated with the conditioning event ek.
More specifically, if L is a risky lottery, then
Pk must be interpreted as the objective prob-
ability Pk = Prob(ek) of this event ek,
whereas if L is an uncertain lottery, then Pk
must be interpreted as the subjective prob-
ability Pk = Prob,*(ek) that the decision
maker chooses to assign to this event ek.
Property (5) is called the expected-utility
property, and any utility function Ui pos-
sessing this property is called a von Neu-
mann-Morgenstern utility function. For
short reference, I will call postulates 1, 2, 3,
and 4 the Bayesian rationality postulates.4
will consistently act on the opinion that some events
are more likely to occur than not to occur, while other
events are more likely not to occur than to occur). In
my own view, consistency in the use of qualitative or
quantitative subjective probabilities should not be
assumed as an axiom, but rather should be inferred
from some more basic-- and, one may hope, more
compelling---axioms. This is the approach taken by
F. J. Anscombe and Robert J. Aumann.
30wing to space limitations, the proof has been
omitted. But see my working paper.
4As M. Hausner has shown, we can obtain a weaker
form of the expected-utility theorem without using
postulate 2: it an individual's preferences satisfy at
least postulates 1, 3, and 4, then his behavior will be
equivalent to lexicographically maximizing the ex-
pected value of a certain utility vector.
226 AMERICAN ECONOMIC ASSOCIATION
Ill. An Axiomatic Foundation
for Utilitarian Morality
Now I propose to show that the Bayesian
rationality postulates, together with a very
natural Pareto optimality requirement, log-
ically entail a utilitarian ethic.
According to Theorems I and 2, the be-
havior of a rational individual i (i = 1 . . . ,
n) would be equivalent to that resulting
from the maximization of the expected
value of some cardinal utility function Ui
expressing his personal preferences. In the
case of most individuals, these personal
preferences will not be completely selfish;
but usually they will give greater weight to
his own personal interests and to the in-
terests of his family, friends, and other asso-
ciates, than to the interests of complete
strangers.
Yet, there are situations where an indi-
vidual's behavior will not be guided by his
more or less self-centered personal prefer-
ences, but rather will be guided by much
more impartial and impersonal criteria. We
expect that judges and other public officials
will be guided in their official capacities by
some notions of public interest and of im-
partial justice; and, more importantly, every
individual will have to be guided by certain
impartial and impersonal criteria when he is
trying to make a moral value judgment. In-
deed, by definition, any evaluative judg-
ment based on biased, partial, and personal
criteria will not be a moral value judgment
at all, but rather will be a mere judgment of
personal preference.
I will describe the criteria guiding an indi-
vidual when he is honestly trying to make
an impartial and impersonal moral value
judgment as this individual's moral prefer-
ences.
In view of Theorems I and 2, if the moral
preferences of an individual i satisfy certain
consistency requirements, then his moral
value judgments will be such as if he tried to
maximize a special utility function ex-
pressing these moral preferences. This util-
ity function will be called his social welfare
function Wi.
I now propose to show that a rational
individual's social welfare function must be
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MAY 1978
a positive linear combination of all indi-
viduals' utility functions. I will assume that
society consists of n individuals. Consider
the social welfare function of individual j.
The following three axioms will be used:
Axiom a: Individual rationality. The
personal preferences of all n individuals sat-
isfy the four Bayesian rationality postulates.
Axiom b. Rationality of moral prefer-
ences. The moral preferences of individual j
satisfy the four Bayesian rationality postu-
lates.
Axiom c. Pareto optimality. Suppose
that at least one of the n individuals person-
ally prefers social situation A over social
situation B, and that none of the other indi-
viduals personally prefers B over A. Then,
individualj will morally prefer A over B.
Axiom a is an obvious rationality re-
quirement. So is Axiom b: it expresses the
principle that an individual making a moral
value judgment must follow, if possible,
even higher standards of rationality than
an individual merely pursuing his personal
interests. Thus, if rationality requires that
each individual should follow the Bayesian
rationality postulates in his personal life as
postulate I asserts, then he must even more
persistently follow these rationality postu-
lates when he is making moral value judg-
ments.5 While Axioms a and b are rational-
ity requirements, Axiom c is a moral
principle-but it is surely a rather noncon-
troversial moral principle.
In view of Theorem 2, Axiom a implies
that the personal preferences of each indi-
vidual i can be represented by a von Neu-
mann-Morgenstern (vN-M) utility function
Ui, whereas Axiom b implies that the moral
preferences of individual j can be repre-
sented by a social welfare function Wjwhich
likewise has the nature of a vN-M utility
function. Finally, the three axioms together
imply the following theorem.
THEOREM 3: Linearity of the social wel-
5Axiom b, and, in particular, the assumption that
people's moral preferences should satisfy the sure-
thing principle, was criticized by Peter Diamond. As I
have tried to show in my 1975 paper, his criticism is
invalid.
 VOL. 68 NO. 2 ECONOMICS AND ETHICS
farefunction. The social welfare function W
of individualj must be a real-valued function
over all social situations A, and must have the
mathematicalform
n be the arithmetic mean of all individual
(6) Wj(A) = ai Ui(A)
with caistrictly positive f(r i = 1, . . n the nature of moral value judgments.
For the proof, see the author (1955, pp.
313-14).6
Note that the proof of Theorem 3 does
not assume the possibility of interpersonal
utility comparisons. The theorem will re-
main valid even if such comparisons are not
admitted. Of course, if such comparisons
are ruled out, then the coefficients ai will
have to be based completely on individual
j's personal-and more or less arbitrary-
value judgments.
On the other hand, if interpersonal utility
comparisons (or at least interpersonal com-
parisons of utility differences) are admitted,
then our three axioms can be supplemented
by a fourth axiom:
Axiom d. Equal treatment of all indi-
viduals. Individual j's social welfare func-
tion Wjwill assign equal weights to the util-
ity functions Ul, . . . , Unof the n individuals
when these utility functions are expressed in
equal utility units.
Using this axiom, we can infer that in (6)
we must have
(7) a, an
IV. The Equiprobability Model for
Moral Value Judgments
The axiomatic analysis of Section III has
the advantage that it uses only extremely
weak philosophical assumptions: it derives
utilitarian ethics from two rationality re-
quirements and one very natural moral re-
quirement. However, if we are willing to
61n view of Hausner's results, a weaker form of
Theorem 3 will remain true even if, in Axioms a and b,
we redefine the Bayesian rationality postulates so as to
omit postulate 2 (the continuity postulate). In this case
both the quantities Ui and the quantity W1will have to
be reinterpreted as lexicographically ordered utility
vectors.
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227
accept somewhat stronger philosophical
commitments,then we can obtain a some-
what stronger form of Theorem 3 (to the
effect that the social welfare function must
utilities). What is more important, we can
achieve deeper philosophical insights into
I have argued that moral value judgments
must be based on impartial and impersonal
criteria. Now I propose to give a more spe-
cific formal definition for this requirement
of impartiality and of impersonality.
Suppose individual j expresses a value
judgment about the relative merits of one
possible social situation A as against an-
other possible social situation B. How do
we know whether he expresses a genuine
moral value judgment, based on impartial
and impersonal considerations? He would
certainly satisfy our impartiality and im-
personality requirements if he did not know
how his choice between A and B would af-
fect him personally and, in particular, if he
did not know what his own social position
would be in situations A and B. More spe-
cifically, let us assume he would think that
in either situation he would have the same
probability I/n to occupy any one of the n
possible social positions and,indeed,to be
put in the place of any one of the n indi-
viduals in the society. Then, he would
clearly satisfy the impartiality and imper-
sonality requirements to the fullest possible
degree. I will call this assumption the equi-
probability model of moral value judg-
ments.
Obviously, this equiprobability model
cannot be taken literally. When individual j
makes a value judgment as to the relative
merits of situations A and B,he will often
have quite a good idea of the actual social
position he would have in each situation;
and he will certainly know his own personal
identity. Nevertheless, his judgment as to
the relative merits of situations A and B will
qualify as a genuine moral value judgment
as long as he at least makes a serious at-
tempt to disregard these morally irrelevant
pieces of information in making this judg-
ment.
If we apply Theorem 2 to this equiprob-
228 A ME'RICAN ECONOMIC ASSOCIA TION
ability model, then we obtain the following
theorem.
THEOREM 4: The social welfare function
as an arithmetic mean of all individual utili-
ties. Suppose that individual j follows the
Bayesian rationality postulates. Then, under
the equiprobability model, he will make his
moral value judgments in such a way as to
maximize the social weljare fitic tion:
n
(8) Wj(A) = - E Ui(A)
The theorem follows from the fact that
under the equiprobability model, j's ex-
pected utility will be given by the right-hand
member of (8).
Unlike Theorem 3, Theorem 4, as well as
the equiprobability model itself, does pre-
suppose the possibility of interpersonal
comparisons of utility differences (utility in-
crements).
To sum up, we have found that the
Bayesian rationality postulates, together
with a Pareto optimality requirement, logi-
cally entail utilitarian ethics (Theorem 3)-
even if interpersonal utility comparisons are
not admitted. But, in actual fact, as I have
tried to show elsewhere (see the author,
1977a), there are no valid arguments against
such comparisons. Yet, once such compari-
sons are admitted, the logical connection be-
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MA Y 1978
tween Bayesian theory and utilitarian moral-
ity becomes even more obvious (Theorem 4).
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Gerard Debreu, Theory of Value, New York
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P. Diamond, "Cardinal Welfare, Individual-
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J. C. Harsanyi, "Cardinal Welfare, Indi-
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