Why is expected utility an important concept in decision-making under risk?

Expected utility is an important concept in decision-making under risk because it evaluates outcomes based on their probabilities. This framework allows individuals to consider not only the potential benefits of different choices but also the likelihood of each outcome occurring. By incorporating probabilities into the decision-making process, expected utility provides a systematic approach to weigh the risks and rewards associated with various options.

This concept is particularly relevant in situations where the consequences of a decision are uncertain and varied, as it helps individuals maximize their overall satisfaction or utility rather than just focusing on the most likely outcome or simplifying their choices by ignoring probabilities. By assessing the expected utility, decision-makers can make more informed choices that align with their risk preferences, whether they are risk-averse, risk-neutral, or risk-seeking.