Expected Utility

Expected utility provides a framework for analyzing consumer decision-making under conditions of uncertainty. When outcomes are uncertain, utility depends on the likelihood of various events occurring. In this context, expected utility is calculated as the weighted sum of the utilities associated with each possible outcome, where the weights correspond to their respective probabilities. For instance, an economic agent derives a utility U(x₁) if event x₁ occurs, U(x₂) if x₂ occurs, and so forth, up to the final possible event x_n. The expected utility E(U) is computed using the following expected utility function:

In uncertain environments, a rational economic agent aims to maximize expected utility - that is, to choose the course of action that yields the highest expected value. The concept of expected utility was formally introduced into political economy by Von Neumann and Morgenstern in the 1940s.