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The passage discusses the history and development of utility theory and decision-making in dealing with risk. It begins by summarizing the theories and breakthroughs that have been discussed in previous chapters, such as Pascal’s Triangle, Bernoulli’s concept of utility, and Bentham’s principle of utility. The author then explores the different ways in which risks can be managed and how information is relevant in decision-making under conditions of uncertainty.

The author acknowledges Daniel Bernoulli’s contribution to utility theory, particularly his concept of utility as a unit for measuring preferences. However, the author points out that Bernoulli’s handling of utility was one-dimensional and did not consider the concept of loss. The author also speculates that Bernoulli’s use of Latin as his language of choice may have hindered the recognition of his accomplishments by economists and students of human behavior.

The passage then discusses the rediscovery of utility theory by Jeremy Bentham, an English philosopher who emphasized the importance of pain and pleasure in decision-making. Bentham’s work focused on the idea that utility represents the benefit or advantage that an object or action brings in terms of happiness. The author notes that utility theory was later applied to economics, specifically in understanding the prices resulting from decisions made by buyers and sellers.

The author highlights the influence of Victorian-era thinking on the development of utility theory. The Victorians had a strong inclination towards measurement and quantification, as seen in the use of statistics for population census and in the insurance industry. However, not everyone embraced the idea of quantifying social sciences, and there were protests that it was too materialistic.

The passage also mentions William Stanley Jevons, a prominent economist of the era, who considered utility as the basis for value in exchange. Jevons believed that value depended entirely on utility and that it could be measured through the variation of utility with the quantity of a commodity already in possession. He also dismissed the problem of uncertainty by suggesting that probabilities could be calculated based on past experience.

Despite the progress made in utility theory, the author notes that theories of decision-making and risk evaluation became detached from everyday life in the real world. During the Great Depression, there was still an optimism that economic fluctuations were temporary and not inherent to the economic system.

Overall, the passage provides an overview of the history and development of utility theory and decision-making, highlighting the contributions of early thinkers like Bernoulli and Bentham, as well as the influence of the Victorian-era thinking and measurement. It also touches on the limitations of early theories and the disconnect between theoretical concepts and real-world applications.

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