Expected Utility - Explained
What is Expected Utility?
Written by Jason Gordon
Updated at April 24th, 2022
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What is Expected Utility?
Expected utility refers to the usefulness, profitability, or utility that an economy is anticipated to accumulate under given circumstances within a space of time.
As a term in economics, the expected utility also describes the anticipated value (utility) an action should produce under certain situations.
Expected utility is also used in decision theory to describe the decisions individuals are expected to make under given circumstances.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
How Does Expected Utility Work?
According to the expected utility hypotheses, individuals have preferences relating to choices that can be made in uncertain conditions.
Each of the choices will have outcomes and these outcomes and the probability of an event occurring are considered under the expected utility.
To calculate the expected utility, the weighted average of all the possible outcomes under given circumstances will be weighed against the probability of an event occurring.
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