Expected Utility Calculator

Make optimal decisions under uncertainty using Expected Utility Theory. Analyze risk preferences, compare alternatives, and choose the best option based on your utility function.

✓ Decision Analysis ✓ Risk Assessment ✓ Utility Theory

Expected Utility Analysis

Utility Function Settings

Choose utility function type

Higher = more risk averse

Current wealth level

Type of decision analysis

Decision Alternatives

Alternative A

Alternative B

Alternative C (Optional)

Expected Utility Formula

EU = Σ p(i) × U(x(i))
Where:
EU = Expected Utility
p(i) = Probability of outcome i
U(x(i)) = Utility of outcome i
Log Utility: U(x) = ln(x)

Decision Scenarios

Investment Choice
Conservative vs Aggressive portfolio
Insurance Decision
Buy insurance vs self-insure
Business Venture
Start business vs keep job

Utility Functions

Logarithmic: U(x) = ln(x) - Risk averse
Power: U(x) = x^α - Flexible risk preference
Exponential: U(x) = -e^(-αx) - Constant risk aversion
Linear: U(x) = x - Risk neutral

Risk Preferences

✓ Risk Averse: Prefer certainty
✓ Risk Neutral: Focus on expected value
✓ Risk Seeking: Prefer uncertainty
✓ Diminishing Marginal Utility: Each additional dollar worth less

Applications

✓ Investment portfolio selection
✓ Insurance purchase decisions
✓ Business strategy choices
✓ Career decision making
✓ Financial planning
✓ Risk management
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Understanding Expected Utility

Expected Utility Theory provides a framework for making decisions under uncertainty by considering both the probability and utility (satisfaction) of different outcomes.

  • Rational Choice: Maximizes expected satisfaction, not just expected value
  • Risk Preferences: Accounts for individual attitudes toward risk
  • Diminishing Returns: Reflects decreasing marginal utility of wealth
  • Decision Framework: Systematic approach to complex choices

Utility Theory Applications

Investment Decisions

Choose optimal portfolio allocation based on risk tolerance and expected returns.

Insurance Analysis

Determine whether to purchase insurance based on premium costs and potential losses.

Business Strategy

Evaluate strategic alternatives considering uncertain market conditions and outcomes.

Personal Finance

Make informed financial decisions that align with your risk preferences and goals.