Decision and Rational Choice·Formalization·Lesson 2 of 5

Expected Value and Expected Utility

Teaches the mechanics of computing expected value across outcomes, introduces utility functions that capture risk aversion through diminishing marginal utility, and walks through the St Petersburg paradox as motivation for why utility must sometimes replace money in the calculation.

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In this lesson · 7 sections · 5 worked examples · 5 practice activities

Expected value is a probability-weighted average
Walking through an expected value calculation
When expected value is and is not the right guide
The St Petersburg paradox and the birth of utility
…and 3 more

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