Expected Utility

As part of rational choice theory, the concept of expected utility is used to elucidate decisions made under conditions of risk. The expected utility of an action is a function of both an agent's estimation of the utility of the various outcomes possible given that action and the likelihood of those outcomes occurring. The utility of an outcome refers to an agent's preference for that outcome. The probability of an outcome refers to the chance of that outcome occurring and can be represented by a number between 0 (no chance) and 1 (perfect certainty). The expected value of an action is calculated by multiplying the utility of each outcome by its probability of occurring and then summing those numbers. Thus, allowing P(o) to refer to ...