[Benholio]

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whats Expected Utility?



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Well, utility is what something is worth to you, or how useful it is to you.

For example, $100 is worth 10 times as much as $10 in actual value and in utility for most of us here. But what about $100 and $1000? $10000 and $100000? $10 million and $100 million?

For that reason, you can have +EV situations that are not +EU, since the larger amount of money isn't worth as much to you as it seems.

Here is an example of a +EV situation that many people wouldn't take (and shouldn't):

You can choose either of the following exactly once:
a) $1 million dollars
b) a 50% chance at $10 million dollars.

Obviously, the EV of b) is much higher than a), but the expected utility of that option will be lower than that of a) for many people.

edit: It is interesting to see what is the highest amount people would gamble for in the above example. People won't always choose the 'right' amount, of course, but it is interesting to see where they draw the line.

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Ok I sort of see.

In pure mathematical terms b) is +EV but in real world "I need to put gas in my car" terms, b) is -EU, correct?

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Yeah, thats the gist of it. It all depends on the person, though. I'm sure Bill Gates is rolling the dice here. Then giving the money to a charity because the warm fuzzy feeling has more utility to him than $10 million.