Questions for you:
- When I evaluate risks or opportunities, do I consider my current circumstances and what I have to lose?
- Do I understand that the same gamble has different value depending on who’s taking it?
- How do my personal circumstances affect what constitutes a “good deal” for me, and have I made that assessment correctly?
Organisational applications:
- Compensation structure design based on employee circumstances:
Recognise that identical compensation packages have vastly different utility to different employees. Someone with substantial savings values additional salary differently from someone living paycheque to paycheque. The same equity grant entails dramatically different risks for a graduate than for someone approaching retirement. Structure flexible benefits allowing employees to optimise for their circumstances—guaranteed base salary versus performance bonuses, immediate cash versus deferred equity, comprehensive insurance versus higher take-home pay. Survey data on choices reveal what different employee groups actually value, rather than what compensation theory suggests they should value. - Risk assessment calibrated to stakeholder positions:
When evaluating business risks, explicitly account for how the same outcome affects different stakeholders asymmetrically. A 20% chance of project failure means different things to the project manager (career damage), finance team (budget impact), and CEO (strategic concerns). Quantify not just probability and magnitude, but whose utility curve applies to each decision. This prevents treating all stakeholders as identical rational actors and reveals why nominally “good” expected-value decisions encounter resistance from parties for whom the downside risk is unacceptable. - Customer pricing and value proposition by segment:
The same product or service has radically different utility to different customer segments based on their circumstances. Enterprise clients value reliability and support differently from startups; established firms value proven solutions, whilst newcomers tolerate higher risk for lower prices. Rather than uniform pricing, structure offerings recognising that identical features deliver different value based on customer context—their risk tolerance, existing alternatives, and what they stand to lose from failure. This explains why value-based pricing works whilst cost-plus pricing systematically misses opportunities. - Investment portfolio construction across stakeholder groups:
Corporate investment decisions require balancing stakeholder groups with fundamentally different utility curves. Shareholders may favour high-variance, high-return strategies, whilst employees prefer stable employment, and creditors want predictable cash flows. Pension fund managers face different constraints from venture capitalists despite both being “investors.” Explicitly map how each major investment decision affects different stakeholders’ utility rather than optimising for a single aggregate measure. This reveals why theoretically optimal strategies create stakeholder conflicts and why compromise solutions that appear suboptimal mathematically prove necessary in practice.
Further reading
On Bernoulli and expected utility theory:
“Exposition of a New Theory on the Measurement of Risk” by Daniel Bernoulli (1738, translated in Econometrica, 1954). Bernoulli’s original paper establishing expected utility theory and the St. Petersburg paradox, demonstrating why people won’t accept mathematically favourable bets that risk their entire wealth.
Expected Utility Hypotheses and the Allais Paradox edited by Maurice Allais and Ole Hagen (D. Reidel, 1979). Classic collection examining challenges to expected utility theory, including the famous Allais paradox demonstrating systematic violations of utility axioms.
Rational Decisions by Ken Binmore (Princeton University Press, 2008). Accessible introduction to decision theory including expected utility, how it works, when it fails, and why it remains foundational despite known limitations.
On behavioural economics and prospect theory:
Thinking, Fast and Slow by Daniel Kahneman (Farrar, Straus and Giroux, 2011). Nobel laureate’s synthesis of decades researching how humans actually make decisions under uncertainty, including prospect theory which describes systematic deviations from expected utility predictions.
“Prospect Theory: An Analysis of Decision under Risk” by Daniel Kahneman and Amos Tversky (Econometrica, 1979). Groundbreaking paper documenting how people systematically violate expected utility theory, valuing gains and losses asymmetrically and distorting probabilities.
Misbehaving: The Making of Behavioral Economics by Richard H. Thaler (W.W. Norton, 2015). History of behavioural economics development, emphasising how understanding actual human decision-making under uncertainty requires abandoning pure expected utility assumptions.
On risk, uncertainty and decision-making:
Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein (Wiley, 1996). Historical examination of how humanity developed frameworks for thinking about risk and uncertainty, from early gambling mathematics through modern portfolio theory and beyond.
Risk Savvy: How to Make Good Decisions by Gerd Gigerenzer (Viking, 2014). Argues humans make better decisions using simple heuristics adapted to context rather than formal expected utility calculations, challenging orthodox decision theory.
The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward by Benoit Mandelbrot and Richard L. Hudson (Basic Books, 2004). Challenges standard financial risk models based on expected utility, arguing real-world risk is fundamentally different from what theory assumes.
On utility in organisational contexts:
Smart Choices: A Practical Guide to Making Better Decisions by John S. Hammond, Ralph L. Keeney and Howard Raiffa (Harvard Business School Press, 1999). Practical decision analysis including multi-attribute utility assessment for complex organisational choices where different stakeholders value outcomes differently.
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The coin in the montage is a two pence piece.
Photo and photo montage Matt Ballantine 2026
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