utility theory

Utility theory, in mathematics and economics, is a framework for understanding decision-making under conditions of risk. It assigns numerical values, or utilities, to different outcomes, reflecting an individual's preferences. The goal is to maximize "expected utility," which is calculated by weighing the utility of each potential outcome by its probability.1

This theory helps explain why people might not always choose the option with the highest average profit, such as buying insurance or playing the lottery. It acknowledges that individuals have varying goals and preferences, and it provides a way to model how they can best achieve those goals. While widely applied in business and economics, some critics argue that the concept is too idealized for real-world decision-making due to human cognitive limitations.21

The concept of utility is also central to utilitarianism, an ethical philosophy that posits actions are right if they promote happiness and wrong if they produce unhappiness, considering everyone affected. In economics, "marginal utility" refers to the additional satisfaction gained from consuming one more unit of a good, which generally decreases as consumption increases. "Total utility" is the overall satisfaction derived from a good or service.345