Expected Utility and Prospect Theory

Expected utility theory offers a way that ranks people’s acts based on their choice worthy. In other words, it means that it is best to choose acts that have a high expected utility. Expected utility theory can be used as a tool to analyze situations where individuals ought to make decisions without knowing their outcomes. On the contrary, prospect theory predicts people’s choices in making decisions, which might be risky. The paper compares and contrasts the prospect and the expected utility theory. Expected utility and prospect theories have their differences. In particular, the expected utility concept assumes that people will choose things that give maximum utility after analyzing the probability of their outcomes. In contrast, the prospect theory enables individuals to choose decisions that do not necessarily lead to maximum utility since there exist other things to be considered (Bazerman & Moore 2013). In that light, expected utility theory targets a specific known outcome to minimize the risk of uncertainties. When it comes to prospect theory, it considers all factors that are appropriate when making specific decisions. As such, people choose decisions that help to meet numerous things without prioritizing expected utility. Another difference between expected utility and prospect theories is that the former is predictable while the latter is unpredictable. Consequently, prospect theory is riskier than expected utility theory, where individuals consider decisions with known outcomes. Despite the differences between expected utility and prospect theories, they have similarities as well. Both concepts are essential in the decision-making process. When considering the best decisions, individuals ought to focus on various available alternatives. ...