Expected Utility Hypothesis

The expected utility hypothesis – that is, the hypothesis that individuals evaluate uncertain prospects according to their expected level of ‘satisfaction’ or ‘utility’ – is the predominant descriptive and normative model of choice under uncertainty in economics. It provides the analytical underpinnings for the economic theory of risk-bearing, including its applications to insurance and financial decisions, and has been formally axiomatized under conditions of both objective (probabilistic) and subjective (event-based) uncertainty. In spite of evidence that individuals may systematically depart from its predictions, and the development of alternative models, expected utility remains the leading model of economic choice under uncertainty.