Let's say for this person, gaining the dollar has a value of 1 utility unit, neither gaining nor losing has a value of 0 utility, and losing a dollar has the utility of -2 utility units. In the example above we have assumed that the organization wants to choose whichever decision maximizes its expected monetary value or minimizes its expected cost. Expected utility and expected value treat people as rational. In this case, the expected value from the flip is 0, and the utility of the expected value is 0 utility. 4.3 Epistemology. The von Neumann–Morgenstern utility function can be used to explain risk-averse, risk-neutral, and risk-loving behaviour. For example, suppose that you are on a game show, and you win $1 million dollars. Expected utility theory is a prescriptive model. Expected Utility v.s Utility of Expected Wealth Sai Ma 1 Examples First, you should realize that these two concepts are all related to Utility and Expectations. I believe one example can help you understand these two concepts well. Both EV and EU use the same inputs as far as dollar amounts and statistical probability of the jobs working out. However, the expected value of the utility … Utility is just some abstract measure of how useful something is, or how much happiness it provides. Expected-utility (EU) theory has been a popular and influential theory in philosophy, law, and the social sciences. Expected Value vs. Expected Utility. The expected value/EMV for Job B is higher than Job A by a huge margin, yet the expected utility for Job A is higher than Job B, but only by a small margin. Stack Exchange network consists of 177 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share … Utility might be different from monetary value. Generalizing to any prospect xwe compare what the utility of its expected value of its expected utility u[E(x)] ≷E[u(x)];.>implies risk aversion,