Utility and entropy

Abstract

In this paper we study an astonishing similarity between the utility representation problem in economics and the entropy representation problem in thermodynamics.

Building theories of economic process

“…Utility in economics has been formulated as a potential function, meaning that the equivalence classes of the ordinal relation provide a so-called foliation of the space of consumption profiles (a set of noncrossing "leaves" that fill the consumption space), or more stringently, that the difference in the cardinal utility between any two profiles can be computed as the sum of utility differences along any path in the consumption space connecting the two profiles. The existence of a utility representation of preferences is a notorious problem in economics [27,28], and in most cases where utilities can be said to exist, it is probably best to regard them as a parametric description of habitual behavior over short times, conditioned by past experience in a technological and cultural setting. 3 It is conventional in general equilibrium modeling to write goods or services directly as arguments to utility function, as if goods "have" intrinsic utility to a given agent.…”

Applications of Entropy in Finance: A Review

“…Candeal et al [75] found a striking similarity between the utility functions in economics and the entropy in thermodynamics. Abbas et al [76] developed an optimal algorithm to obtain Von Neumann-Morgenstern utility value choice.…”

Probabilities and Shannon's Entropy in the Everett Many-Worlds Theory

“…(19) A rational person would choose the expected value of |y with an observableX EU(|y ) = y|X|y (20) and since…”

“…That the rewards are determined by the negative information content is already known and is used for the utility representation problems in economics [20][21][22] …”