The rational finance paradigm covers a number of theories defining the sequence of economic decisions by a human being, on the basis of which the following theories of rational finances were formed: Expected Utility Hypothesis
by Neumann-Morgenstern (1944), Portfolio Theory by Markowitz (1952), Life Cycle Hypothesis by Modigliani and Brumberg (1954), Permanent Income Hypothesis by Friedman (1957), Efficient Market Hypothesis by Fama (1991) (Fig.
Weak experimental verification of the expected utility hypothesis
Allais believed that a fundamental theory about the psychology of risk is missing in the expected utility hypothesis
The resolution of the paradox led to the explicit introduction of the notion of utility of money, the expected utility hypothesis
, and the principle of diminishing marginal utility.
Arrow and Hurwicz (1972; hereafter written AH) attack the use of the expected utility hypothesis
in conditions of pure uncertainty, that is, when "there is no a priori information available which gives any state of nature a distinguished position" (p.
Individual preferences over random lifetime consumption are supposed to satisfy the expected utility hypothesis