Expected utility/value

Expected value can be calculated where a situation has an uncertain outcome and the possible outcomes can be assigned probabilities. The EV approach is useful in predicting the expected outcome of situations involving risk. However, it is less useful as a tool for decision-making, since it does not account for the fact that the value of a unit of consumption gained may be lower than the negative value of a unit of consumption lost. The expected utility hypothesis is the hypothesis in economics that the utility of an agent facing uncertainty is calculated by considering utility in each possible state and constructing a weighted average. The weights are the agent's estimate of the probability of each state. The expected utility is thus an expectation in terms of probability theory. A related concept is the certainty equivalent of a gamble.