The expected utility hypothesis is the hypothesis in
economics that the
utility of an 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. To determine
utility according to this method, the decision maker must rank their preferences according to the outcomes of various decision options. According to the theory, if someone prefers A to B and B to C, then weights for the weighted average must exist such that she is
indifferent between receiving B outright and gambling-- with the specified weights-- between A and C.
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