Expected Utility Calculator

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 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.



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expected utility formula