In
economics,
game theory, and
decision theory the
expected utility hypothesis is a hypothesis concerning people's preferences with regard to choices that have
uncertain outcomes (gambles). This hypothesis states that if specific
axioms are satisfied, the subjective value associated with an individual's gamble is the statistical expectation of that individual's valuations of the outcomes of that gamble. This hypothesis has proved useful to explain some popular choices that seem to contradict the
expected value criterion (which takes into account only the sizes of the payouts and the probabilities of occurrence), such as occur in the contexts of gambling and insurance.
Daniel Bernoulli initiated this hypothesis in 1738. Until the mid-twentieth century, the standard term for the expected utility was the
moral expectation, contrasted with "mathematical expectation" for the expected value.