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Expected Utility - Explained

What is Expected Utility?

Written by Jason Gordon

Updated at April 24th, 2022

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Table of Contents

What is Expected Utility?How Does Expected Utility Work?

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. 

Related Topics

  • Total Utility (Economics)
  • Marginal utility
  • Efficiency Principle
  • Diminishing Marginal Utility
  • Expected Utility
  • Subjective Theory of Value
  • Positional Goods
expected utility

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