Expected Utility

Expected Utility is a decision-making concept used to evaluate uncertain outcomes. It combines the potential benefits of different choices with the likelihood of those outcomes occurring. Essentially, when faced with decisions under uncertainty, individuals assess the value or utility of each possible outcome, multiply that value by its probability, and then sum these results. This gives a comprehensive picture of what to expect from each option. By choosing the option with the highest expected utility, individuals can make more informed and rational decisions that align with their preferences and risk tolerance.