Ordinal utility in the context of "Normal-form game"

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⭐ Core Definition: Ordinal utility

In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask how much better it is or how good it is. All of the theory of consumer decision-making under conditions of certainty can be, and typically is, expressed in terms of ordinal utility.

For example, suppose George tells us that "I prefer A to B and B to C". George's preferences can be represented by a function u such that:

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👉 Ordinal utility in the context of Normal-form game

In game theory, normal form is a description of a game. Unlike extensive form, normal-form representations are not graphical per se, but rather represent the game by way of a matrix. While this approach can be of greater use in identifying strictly dominated strategies and Nash equilibria, some information is lost as compared to extensive-form representations. The normal-form representation of a game includes all perceptible and conceivable strategies, and their corresponding payoffs, for each player.

In static games of complete, perfect information, a normal-form representation of a game is a specification of players' strategy spaces and payoff functions. A strategy space for a player is the set of all strategies available to that player, whereas a strategy is a complete plan of action for every stage of the game, regardless of whether that stage actually arises in play. A payoff function for a player is a mapping from the cross-product of players' strategy spaces to that player's set of payoffs (normally the set of real numbers, where the number represents a cardinal or ordinal utility—often cardinal in the normal-form representation) of a player, i.e. the payoff function of a player takes as its input a strategy profile (that is a specification of strategies for every player) and yields a representation of payoff as its output.

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Ordinal utility in the context of Ranked voting

Ranked voting is any voting system that uses voters' rankings of candidates to choose a single winner or multiple winners. More formally, a ranked vote system depends only on voters' order of preference of the candidates.

Ranked voting systems vary dramatically in how preferences are tabulated and counted, which gives them very different properties. In instant-runoff voting (IRV) and the single transferable vote system (STV), lower preferences are used as contingencies (back-up preferences) and are only applied when all higher-ranked preferences on a ballot have been eliminated or when the vote has been cast for a candidate who has been elected and surplus votes need to be transferred. Ranked votes of this type do not suffer the problem that a marked lower preference may be used against a voter's higher marked preference.

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Ordinal utility in the context of Cardinal utility

In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. how much better or worse one outcome is compared to another.

In consumer choice theory, economists originally attempted to replace cardinal utility with the apparently weaker concept of ordinal utility. Cardinal utility appears to impose the assumption that levels of absolute satisfaction exist, so magnitudes of increments to satisfaction can be compared across different situations. However, economists in the 1940s proved that under mild conditions, ordinal utilities imply cardinal utilities. This result is now known as the von Neumann–Morgenstern utility theorem; many similar utility representation theorems exist in other contexts.

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Ordinal utility in the context of Dichotomous preferences

In economics, dichotomous preferences (DP) are preference relations that divide the set of alternatives to two subsets, "Good" and "Bad".

From ordinal utility perspective, DP means that for every two alternatives :

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Ordinal utility in the context of Arrow's impossibility theorem

Arrow's impossibility theorem is a key result in social choice theory showing that no ranked-choice procedure for group decision-making can satisfy the requirements of rational choice. Specifically, Arrow showed no such rule can satisfy independence of irrelevant alternatives, the principle that a choice between two alternatives A and B should not depend on the quality of some third, unrelated option, C.

The result is often cited in discussions of voting rules, where it shows no ranked voting rule can eliminate the spoiler effect. This result was first shown by the Marquis de Condorcet, whose voting paradox showed the impossibility of logically-consistent majority rule; Arrow's theorem generalizes Condorcet's findings to include non-majoritarian rules like collective leadership or consensus decision-making.

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