Enter the probabilities and the possible outcomes of those probabilities of two different events to calculate the expected utility.
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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
An expected utility is a measure of the sum of probabilities and possible outcomes of a set of monetary outcomes.
Expected Utility Example
How to calculate expected utility?
- 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 $150.
- Next, determine the probabilities of the events.
For this example we will say there is a 45% chance of winning 100$ and 35% chance of winning $150.
- Finally, calculate the expected utility.
Calculate the expected utility using the formula. So E(u) = .45*100^.5 + .35*150^.5 = 8.76
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