Expected Utility Theory
The normative standard: weigh each outcome by its probability and value, and choose the highest total; real choices depart from it systematically, and knowing the standard is how you notice the departures.
An everyday example
A 60% chance of $10,000 is worth more than a sure $5,000 in expectation, and most people take the $5,000.
What it can cost you
Using the theory as a description of how people (including you) choose; or ignoring it and deciding entirely on feel.
Warning signs
- I never computed the expectation.
- My deviation has no reason I can state.
One thing to do
Compute the expected value as one input, then ask explicitly what your departure from it is buying you.
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