Expected Utility Calculator
Make optimal decisions by calculating the expected utility of different choices under uncertainty
Decision Options
Utility Function Parameters
Decision Analysis Results
| Option | Expected Value | Expected Utility | Certainty Equivalent | Risk Premium |
|---|---|---|---|---|
| Enter your options and scenarios to see results | ||||
Run the calculation to determine the optimal decision.
Risk Sensitivity Analysis
Your risk sensitivity analysis will appear here.
📚 Decision Theory Concepts
Expected Utility Theory
A framework for analyzing decisions under uncertainty, where choices are made to maximize expected utility rather than expected value.
Risk Aversion
When an individual prefers a certain outcome over a gamble with higher expected value but more uncertainty.
Certainty Equivalent
The guaranteed amount an individual would accept instead of taking a risky bet with higher expected value.
Risk Premium
The difference between the expected value and the certainty equivalent, representing what you'd pay to avoid risk.
💼 Practical Applications
Expected utility theory helps investors choose between different asset allocations based on their risk tolerance. A risk-averse investor might prefer bonds over stocks despite lower expected returns because the utility of more certain outcomes outweighs the potential for higher but riskier returns.
People buy insurance despite it being a "negative expected value" proposition because the utility of avoiding catastrophic loss is greater than the utility of the insurance premium. This explains why risk-averse individuals are willing to pay more than the actuarially fair price for insurance.
Companies use expected utility to evaluate projects with uncertain outcomes. A pharmaceutical company might pursue a drug with lower expected profits but more certain regulatory approval over a potentially more profitable but riskier alternative.
Note: This calculator provides estimates based on expected utility theory. Actual decision-making may involve additional psychological and contextual factors not captured in this model.