Enter the probabilities and the possible outcomes of those probabilities of two different events to calculate the expected utility.

## Expected Utility Formula

The following formula is used to calculate the expected utility of two outcomes.

E(u) = P1(x) * Y1.5 + P2(x) * Y2.5

• Where E(u) is the expected utility
• P1 and P2 are the probabilities of the possible outcomes
• Y1 and Y2 are the monetary values of those outcomes

## Expected Utility Definition

Expected utility is defined as the measure of the sum of probabilities and potential outcomes of a set of monetary events.

## Expected Utility Example

How to calculate expected utility?

1. First, determine the two possible monetary events.

For this example, we will analyze the chance of receiving a lump sum of money through a not realistic lottery. So, the two possible outcomes are someone winning $100 or winning$150.

2. Next, determine the probabilities of the events.

For this example, we will say there is a 45% chance of winning 100$and a 35% chance of winning$150.

3. Finally, calculate the expected utility.

Calculate the expected utility using the formula. So E(u) = .45*100^.5 + .35*150^.5 = 8.76

## FAQ

What is an expected utility?

An expected utility is a measure of the sum of probabilities and possible outcomes of a set of monetary outcomes.