You calculate expected utility using the same general formula that you use to calculate expected value. Instead of multiplying probabilities and dollar amounts, you multiply probabilities and utility amounts. That is, the expected utility (EU) of a gamble equals probability x amount of utiles.
What is the utility of wealth?
Quick Reference. The increase in an individual’s utility consequent on a small increase in their total wealth, per unit of the increase. If an individual is risk-averse the marginal utility of wealth is a decreasing function of wealth.
What is expected utility with example?
The expected utility of a reward or wealth decreases when a person is rich or has sufficient wealth. In such cases, a person may choose the safer option as opposed to a riskier one. For example, consider the case of a lottery ticket with expected winnings of $1 million.
How do you calculate the expected utility of an action?
expected utility, in decision theory, the expected value of an action to an agent, calculated by multiplying the value to the agent of each possible outcome of the action by the probability of that outcome occurring and then summing those numbers.
How do you calculate maximum expected utility?
Quote from video: By the action. And then I multiply that by the utility of the state action pair. And I sum up over all possible states that I might end up with.
How do you calculate utility?
To find total utility economists use the following basic total utility formula: TU = U1 + MU2 + MU3 … The total utility is equal to the sum of utils gained from each unit of consumption. In the equation, each unit of consumption is expected to have slightly less utility as more units are consumed.