Login with Facebook

Expected Utility

We always have to make decisions under uncertain conditions. For instance, pursuing a degree in economics may lead to employment with a large company, or unemployment and leave with crushing debt. Or a doctor's appointment may lead to early detection and treatment of serious diseases, or it could bet a total waste of money. Getting a job in a certain company can be the best way to live the life you want, or it can be the beginning of a stressful career path. All these scenarios show that life is always compelling use to make decisions. And it is like the two sides of a coin where you only have to choose one. But we make our decisions based on the best-expected outcome. Human beings are rational decision-makers who decide based on the risk level. Expected utility theory tells it explains how to choose rationally when one is not sure about the outcome of the action. This model can be summarized in the slogan "choose the action with the highest expected utility."

So, how do, or should people make decisions? Expected utility is a normative theory, which means it tries to answer this question. In other words, it is a model of how people SHOULD make decisions, how they DO make decisions, or a PREDICTIVE theory. This theory may not be the perfect model of the psychological approach to decision-making, but it offers a precise prediction of people's choices. The theory attempts to make faulty predictions about people's decisions in many real-life decisive situations (Kahneman & Tversky 1982). However, it does not tell whether decision-makers should base their choices on expected utility consideration.

In this unit, we shall be discussing the theory of expected utility. The expected utility of an action is seen as the weighted average of every possible outcome's utilities. Here, the utility of an outcome measures the extent of the outcome's preferability in relation to the alternatives. In other words, we make a decision according to the probability that the act will lead to the desired outcome. As rational decision-makers, human beings do not like to lose. Every decision they make has to look like the best choice for their lives. We shall be expounding on this basic definition using more terms that explain decision-making processes and the relationship between expected utility and choice. We will also briefly highlight the two main arguments used in explaining expected utility: representation theorems and long-term statistical arguments.

What is the expected utility?

Expected utility is a concept that can be best explained using examples. Terms alone will not be enough to give you the right understanding. Let's say you want to go for a walk that might take several hours, and you need to either take and umbrella or leave it. How would you determine the best decision? They would rather not struggle under a sunny day for many people, but they would rather go into the rain with one than leaving. Hence, there are two acts you need to take here, one is taking the umbrella, and the second is leaving at home. Which one is the best course of action?

This is an informal recast that can get a bit more formally when three types of entities are involved:

- First, the outcomes are inevitable. These are the objects of non-instrumental preferences. In the example above, you can end up dry and without an umbrella, or dry and encumbered with a heavy, unstylish umbrella, or up wet because you left the umbrella.

- Second, the states. These are things outside that decision-makers cannot control and impacts the outcome of their decisions. In the example used above, it is either going to rain or not. This is the issue of the weather, which is outside your control.

- Third, acts. These are the objects of decision-makers' instrumental preferences. To some extent, these are things you can do as a decision-maker. In the example used, two actions are possibilities: one to bring the umbrella or to leave it at home.

Expected utility theory offers a way of listing and ranking the acts based on how choice-worthy they are. Higher expected utility is more considerable in choosing the act. This means it is better to choose the action with the highest expected utility, or at least one, where several acts are involved. Based on the general convention, we can make several assumptions about the relationship between acts, states, and outcomes.

-  We can say that states, acts, and outcomes are propositions. This means there are sets of possibilities. A maximal set of possibilities, Ω, of which each state, act, or outcome is pre-set.

-  The group of acts, groups of states, and a group of outcomes are all partitions on Ω. This is to say acts and states are all made individual, where the possibility in Ω, is one a point where the one state obtains and the agent performance on exact action to ensure a specific outcome.,

-  We can also assume that acts are logically independents. No state rules out the performance of any act.

Looking at the example of the umbrella above, we can represent this argument in several matrices, where each entity is a representation of a different state on the world, the act, and the outcomes are performed in the real world. This is a framework that can be used to understand the real meaning of expected utility by stating that the expected utility of act A, (like taking the umbrella on your walk), is determined by two in critical features if the problem is faced:

- That the value of the individual outcome, which is measured by a real number, is called utility.

- And that probability of each outcome depends on A.

There are two terms used often explaining expected utility:

Conditional probabilities

This factor represents how likely it is that the outcome will occur, supposing the agent chooses A. To get the right idea here, we must first look at which interpretations of probability is appropriate, and secondly, what it means to assign probability on the supposition that the decision-maker will settle on A. Theorists of expected utility often consider probability as a measurement of the individual degree of belief. In other words, preposition E is likely to the extent that the agent is confident of E. We can interpret formalism as an objective I chances.

Outcome utilities

The term U (o) can be used to represent utility outcome o – roughly, how valuable o is. U is a function o that gives a real number to each of the outcomes in informal situations. The most important question here concerns the kind of value measured in utiles – typically not taken as currency units. According to Bernoulli (1738), money and more goods have a diminishing marginal utility, whereby, as the agent gets richer, every successful coin is less valued than the last.

Bentham (1738), classic utilitarian, defines utility as a measure of happiness or pleasure. Therefore, Saying that has a greater utility than B is to say that A brings out more pleasure or happiness. However, this interpretation has been faced by several objections, with one stating that there may not be a single good with rationality expected to gain.

Modern decision theorists look at utility as the measure of preference. This means saying A has a greater utility than B means the agent will choose A over B. We need to understand the Expected utility theory does not require that preferences are selfish or ego-centric. For instance, a decision-maker may be more willing to give money to a charity that spends the same on lavish dinners. Or a parent sacrificing their life by donating organs, then allow their child to die.

Thoughts on expected theory

Sometimes understanding why someone can choose acts that maximize expected theory can be harder than you may think. But there are a few arguments that can help you get the right information much faster. One good solution is that the expected utility theory is rational bedrock. In simple terms, end rationality takes into account the maximization of expected utility. Some analysts, or even students, may find this argument less satisfying. But there are many other sources of justification that bring out the real picture. These are: long term arguments and representation theorems

Under LONG-RUN ARGUMENTS, maximization expects utility because it makes good policy in the long term. Feller (1968) looks at this argument from his own perspective, considering two mathematical facts about probability, which are the strong and weak laws of numbers. In each of these facts, there is a consideration of sequences of independent, identically in distributed trials. This is the kind of setup that comes from betting the same repeatedly on a sequence of spins games.

As expected, there are several objections to long arguments. For instance, many decisions cannot be repeated over indefinitely similar trials. Such decisions as which career one should pursue, whom they should marry, where to live, and many others are repeated over a small number of times. Also, when they are made more than once, the decisions cause different outcomes. Another argument is based on the independence assumptions, one or both, which may not be successful. One argument state that the probabilities of different trials are independent. This can be associated with casino gambles, though not true with other choices, like medical treatment choices. Another argument is that the strong and weak laws of large numbers are modally weak. None of the laws handles the fact that if a gamble were placed over and over indefinitely, the expected utility of the game would close with the average utility gain per trial.

REPRESENTATION THEOREMS is another argument of expected utility, which relies on. Zynda (2000), tries to formulate this argument by slightly modifying it to represent the role of utilities and probabilities. There are three sections of the argument: The rational condition, where the axioms of expected utility theory are used for rational preferences; representability, where one can be seen as having statuses of the belief that obey the laws of probability calculus if their preferences are in line with the axiom of expected utility theory; the reality condition, where a some represented as having degrees of belief in line with probability calculus can obey the laws of the calculus.

In this case, if decision-makers fail to pick acts with higher utility, they are seen to have violated axioms (or at least one) of rational preferences. If there is any truth in these preferences, then the argument means there is a problem with people whose preferences do not go with expected utility theory. Representation theorems are mathematical proofs of representability. No matter the axioms used, Rationality Condition and Reality Condition are controversial. Anyone trying to defend this argument can argue that what it is to have specific degrees of belief in and utilities is all about correspondent theorems.

Three influential representation theories differ from each other in three ways. One that these theorems disagree on the objects of preference, they differ in their treatment of probability. Each one proves that there are a probability and utility function representation for every suitable preference ordering. In these situations, it is easy to argue that representation theorems are perhaps the most suitable approach to understanding expected utility. Nevertheless, there are many arguments against is that it cannot be ignored.


Expected utility theory is a model that estimates the likely utility of a decision. There is uncertainty in the outcome, and the theory suggests that the rational choice is to pick the action with higher expected utility.

In economics and public policy, the expected utility gained traction in the 1940s and 50s across the US because it has the potential to provide a mechanism that would define the behavior of macro-economic variables. It has since become one of the main reference points when looking at consumer behaviors.

In public policy, it has several applications too. Harsanyi (1953), picks from this theory to explain how most socially just arrangements is one that maximizes combined welfare distribution among societies. It is, thereforeExpected Utility, a critical subject to look at for economy students.

Author: James Hamilton

Need a custom

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Cognitive Computing- How does Cognitive Computing work?
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Demographic trends and how they affect Economic Growth
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Everything you need to know about short-term memory
Economic and Policy Impacts of Demographics
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Factors of Demographic Data Collection
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How Relativism Promotes Pluralism and Tolerance
How to use the audience’s feedback to write a news report
History of silent cinema
How news report can be strengthened through multimedia
Introduction to Population Problems
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Magnetoencephalography (MEG)
Microeconomic Analysis to the Demand for Labor
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Objections to utilitarianism
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Population Demographics
Recurrent neural networks (RNN) for speech detection
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Stochastic optimization methods in deep learning?
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
The climate change denial
The techniques of basic cinematography
The Endosymbiotic Theory
The Role of Internal Audit in Corporate Risk Management
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What are the linear models in machine learning?
What is Convolutional Neural Network
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
How to use quotes in your news reports?
How news report can be strengthened through multimedia
History of silent cinema
How to use the audience’s feedback to write a news report
How Relativism Promotes Pluralism and Tolerance
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
Introduction to Population Problems
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
The Endosymbiotic Theory
The techniques of basic cinematography
The climate change denial
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?
What is TES-Transcranial electrical stimulation?
What is Relativism?
What is Vaccine skepticism, and what to do about it?
What happens in the brain when learning?
What is the deep neural network?
What is Convolutional Neural Network
What are the linear models in machine learning?