Common
Expected utility hypothesis
Concept in economics
Expected utility hypothesis
The expected utility hypothesis is a foundational assumption in mathematical economics concerning decision making under uncertainty. It postulates that rational agents maximize utility, meaning the subjective desirability of their actions. Rational choice theory, a cornerstone of microeconomics, builds this postulate to model aggregate social behaviour. The expected utility hypothesis states an agent chooses between risky prospects by comparing expected utility values (i.e., the weighted sum of adding the respective utility values of payoffs multiplied by their probabilities). The summarised formula for expected utility is U ( p ) = ∑ u ( x k ) p k {\displaystyle U(p)=\sum u(x_{k})p_{k}} where p k...
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