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EX P EC TED U TILITY A S A
B A S IS FO R D EC IS IO N -
M A K IN G : TH E EV O LU TIO N
O F TH EO R IES
Expected U tility
Expected utility rests on the expected utility
hypothesis.
This hypothesis is related with peoples
preferences with regard to their choices that
have uncertain outcomes.
Three main pillars of expected utility are as follows:
Outcomes, which are objects of non-
instrumental preferences.
States are the things outside the decision-
makers control which influence the outcome of
the decision.
Acts are objects of the decision-makers
instrumental preferences
EX P EC TED VA LU E
In the presence of risky outcomes, usually a
decision-maker uses the expected value
criterion for an investment option.
The expected value (EV) is an anticipated
value for a given investment.
The EV is calculated by multiplying each of the
possible outcomes by the likelihood each outcome
will occur, and summing all of those values.
By calculating expected values, investors can
choose the scenario most likely to give them their
desired outcome.
UTILITY
The value of each outcome, measured in terms of real
numbers (mathematical form) is called a utility
D EV ELO PM EN T O F EX PECTED U TILITY
TH EO RY