What is the meaning of expected utility in decision-making?

Expected utility refers to a fundamental concept in decision theory and economics that allows individuals to make informed choices under uncertainty. It is based on the idea that people evaluate potential decisions not just by the outcomes themselves, but rather by the utility or satisfaction those outcomes provide.

By calculating the expected utility, you assess the weighted average of all possible utilities that could arise from different outcomes, taking into account the probabilities of each outcome occurring. This means that each possible outcome is considered in terms of both its value (utility) and how likely it is to happen. Thus, when individuals are faced with multiple choices, they will opt for the option that provides the highest expected utility, effectively weighing their satisfaction against the likelihood of each scenario.

This framework helps explain how people make rational choices, as they tend to prefer options that maximize their overall expected satisfaction, rather than simply choosing the most probable outcome or the option that leads to the highest immediate gain.