What is Expected Utility Theory

Decisions, decisions, decisions, we are constantly faced with them everyday. Should I get out of bed or sleep 10 more minutes? Should I hit the delete key or save as a new document? Should I take the dishes to the sink or wait and see if my spouse will do it? Inherent in most decisions is the tradeoff between some benefit and decrement we may face along with an element of risk. The course of action that we choose to take has always been of interest to scholars. Fitting the principles of decision-making into an a priori developed plan to choose which alternative is “best” is, by and large, what most consider to be rationality. Because the decisions that we make have so much influence in our life, their importance cannot and should not be underestimated. While we cannot always know which decision will eventually hold the greatest benefit, it is an aspect of human nature to gamble on the best option, but only when the gamble seems warranted. Determining what is the “rational” choice allows us to at least rest easy in the assumption that the decisions that we have made are the right ones. Interestingly, as time immortal has shown, making the right or “rational” decision does not always provide the most favorable outcome.