What Is It Like to Talk Batty? at Steven Landsburg — Rational expectation versus expected utility
Rational expectations is a theory of equilibrium (i.e. the outcomes that you get when decision-makers interact); expected utility is a theory of optimization (i.e. the choices made by an individual decision-maker). When Nagel throws around probabilities of 10, 50 or 80 percent, expected utility theory (like Nagel) takes those probabilties as given; rational expectations theory (which has nothing whatsoever to do with anything Nagel is talking about) tries to explain where those probabilities come from. (…)
What economists do believe (or act as if they believe) is that people maximize expected utility, which is a different thing altogether. To assess the value of a 50% chance of $100, we multiply 50% times a number called the utility of $100, and we predict that when confronted with multiple choices, they choose the one that maximizes their expected utility.
