Title UNIT 4.docx ✅

UNIT-4 Decisions Under Uncertainty Expected Utility, Measuring and Interpreting Risk; Risk and Investment Decision. Expected Utility, Measuring and Interpreting Risk; Expected utility Expected utility is a concept in decision theory and economics that measures the desirability or satisfaction associated with a particular outcome or decision. It combines two key elements: the probabilities of different outcomes occurring and the utility or value that an individual assigns to each outcome. In simple terms, expected utility represents the average utility or satisfaction that an individual expects to receive from a decision or action, taking into account the probabilities of different outcomes. It helps individuals make rational choices by considering both the potential benefits and the likelihood of those benefits occurring. The formula for expected utility is: EU=∑i​Pi​×Ui​ Where: EU is the expected utility. Pi​ is the probability of outcome i occurring.