About Expected Utility Calculator
The Expected Utility Calculator helps in decision-making under uncertainty by calculating the expected utility of different outcomes. It considers the probability of each outcome and its utility value, enabling rational decision-making. This is widely used in economics, finance, and behavioral sciences.
Formula of Expected Utility
The formula for Expected Utility is:
EU = \( \sum_{i=1}^n P_i \times U_i \)
Where:
- Pi: Probability of outcome i
- Ui: Utility of outcome i
How to Use
To use the Expected Utility Calculator, enter the probabilities and utilities of each outcome. Ensure the probabilities add up to 1 (or 100%). Click the "Calculate" button to compute the expected utility. Use the "Clear" button to reset all fields.
Calculator
FAQs
1. What is the Expected Utility Calculator?
The Expected Utility Calculator is a tool that helps in calculating the expected utility based on the probabilities and utilities of various outcomes. It is commonly used in economics, finance, and behavioral sciences to make rational decisions under uncertainty.
2. How is expected utility calculated?
Expected utility is calculated by multiplying the probability of each outcome by its utility value and summing them up. The formula is EU = \( \sum_{i=1}^n P_i \times U_i \).
3. What are examples of expected utility?
Examples include investment decisions, insurance purchase, and game theory scenarios. For instance, deciding between two investment options with different probabilities and returns.
4. Why is expected utility important?
It provides a quantitative method for decision-making under uncertainty, ensuring optimal choices based on potential outcomes and their likelihoods.
5. Can this calculator handle negative utilities?
Yes, the calculator accepts negative utility values, which can represent losses or undesirable outcomes.
6. Do probabilities need to sum to 1?
Yes, probabilities should ideally sum to 1 (or 100%) to ensure accuracy in the expected utility calculation.
7. What happens if probabilities exceed 1?
If probabilities exceed 1, the calculation may give incorrect results. Ensure valid input where probabilities sum to 1.
8. Can this calculator be used for real-world scenarios?
Absolutely. It is designed to handle probabilities and utilities for various real-world applications, including investments, insurance, and risk analysis.
9. Is the tool suitable for students?
Yes, it is an excellent tool for students learning about decision theory, utility, and probabilities in economics and related fields.
10. Is the Expected Utility Calculator free to use?
Yes, the tool is free to use and provides quick, accurate calculations for expected utility.