Expected Utility vs. Expected Value

Attribute	Expected Utility	Expected Value
Definition	Expected Utility is a theory in economics that measures the value of an outcome based on an individual's preferences and attitudes towards risk.	Expected Value is a concept in probability theory that calculates the average outcome of a random variable over multiple trials.
Formula	EU = Σ (pi * ui)	EV = Σ (pi * xi)
Risk Attitude	Expected Utility takes into account an individual's risk attitude by incorporating a utility function that reflects their preferences for risk.	Expected Value does not consider an individual's risk attitude and treats all outcomes equally based on their probabilities.
Decision Making	Expected Utility theory suggests that individuals make decisions based on maximizing their expected utility rather than expected monetary value.	Expected Value theory suggests that individuals make decisions based on maximizing their expected monetary value without considering their preferences for risk.

Introduction

Expected Utility and Expected Value are two concepts that are commonly used in decision theory and economics to evaluate the outcomes of different choices. While both are used to assess the potential outcomes of a decision, they have distinct attributes that make them unique. In this article, we will compare and contrast the attributes of Expected Utility and Expected Value to understand how they differ in their application and interpretation.

Expected Utility

Expected Utility is a concept that takes into account the preferences of an individual when evaluating the outcomes of a decision. It considers not only the potential monetary gains or losses but also the subjective value that an individual places on these outcomes. Expected Utility theory assumes that individuals make decisions based on their preferences and the expected utility of each possible outcome.

One of the key attributes of Expected Utility is that it incorporates risk aversion or risk-seeking behavior into the decision-making process. Individuals with different risk preferences will assign different utilities to the same monetary outcomes, leading to varying decisions based on their risk attitudes. Expected Utility theory allows for a more nuanced evaluation of decisions by considering the individual's subjective preferences.

Another important attribute of Expected Utility is that it can account for uncertainty and ambiguity in decision-making. By assigning probabilities to different outcomes and incorporating the individual's utility function, Expected Utility theory can provide a more comprehensive assessment of the potential outcomes of a decision. This allows for a more informed decision-making process that takes into account both the probabilities and the subjective preferences of the decision-maker.

Expected Value

Expected Value, on the other hand, is a concept that focuses solely on the monetary outcomes of a decision. It calculates the average value of all possible outcomes based on their probabilities, without considering the individual's preferences or risk attitudes. Expected Value is a more straightforward and objective measure of the potential outcomes of a decision, as it is based solely on the probabilities and payoffs of each outcome.

One of the key attributes of Expected Value is that it provides a clear and concise measure of the potential outcomes of a decision. By calculating the average value of all possible outcomes, Expected Value allows for a simple comparison of different choices based on their expected monetary payoffs. This makes it a useful tool for decision-making in situations where the individual's preferences or risk attitudes are not a primary concern.

Another important attribute of Expected Value is that it is a linear measure that does not account for the diminishing marginal utility of money. This means that Expected Value treats all monetary outcomes as equally valuable, regardless of the individual's preferences or risk attitudes. While this simplicity can be advantageous in some decision-making contexts, it may not capture the full complexity of decision-making under uncertainty.

Comparison

When comparing Expected Utility and Expected Value, it is important to consider their respective attributes and how they impact the decision-making process. Expected Utility takes into account the individual's preferences and risk attitudes, providing a more nuanced evaluation of decisions that considers both the probabilities and the subjective value of outcomes. On the other hand, Expected Value focuses solely on the monetary outcomes of a decision, providing a more objective measure of the potential payoffs based on probabilities alone.

• Expected Utility incorporates risk aversion and risk-seeking behavior into decision-making.
• Expected Value provides a clear and concise measure of potential outcomes based on probabilities.
• Expected Utility accounts for uncertainty and ambiguity in decision-making.
• Expected Value treats all monetary outcomes as equally valuable, regardless of preferences.

While Expected Utility may be more complex and subjective than Expected Value, it allows for a more personalized evaluation of decisions that takes into account the individual's risk attitudes and preferences. Expected Value, on the other hand, provides a simpler and more objective measure of potential outcomes that may be more suitable in situations where the individual's preferences are not a primary concern.

Conclusion

In conclusion, Expected Utility and Expected Value are two important concepts in decision theory that offer different perspectives on evaluating the outcomes of decisions. Expected Utility considers the individual's preferences and risk attitudes, providing a more nuanced and personalized evaluation of decisions. Expected Value, on the other hand, focuses solely on the monetary outcomes of a decision, providing a more objective and straightforward measure of potential payoffs. By understanding the attributes of Expected Utility and Expected Value, decision-makers can make more informed choices that take into account both the probabilities and the subjective value of outcomes.