Expected Utility - Explained
What is Expected Utility?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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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.
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.
Related Topics
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Utilitarianism
- Indifference Curve
- Time Preference Theory of Interest
- Incentives
- Marginal Benefit
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost