Expected utility is a foundational concept in decision theory and economics — developed by Daniel Bernoulli and formalised by John von Neumann and Oskar Morgenstern — that describes how rational individuals make choices under conditions of risk and uncertainty by maximising the weighted average of the utility (subjective satisfaction or welfare) of all possible outcomes, with each outcome weighted by its probability of occurrence. Unlike expected value (which only considers monetary outcomes), expected utility accounts for the diminishing marginal utility of wealth — the insight that an additional ₹1,000 matters more to someone with ₹10,000 than to someone with ₹10 crore — explaining why people buy insurance (accepting a certain small loss to avoid a large uncertain one) and why risk aversion is the dominant human behaviour. For investors and portfolio managers on Ventura Securities, expected utility theory provides the theoretical underpinning for modern portfolio construction, risk-adjusted return optimisation, and the design of investment strategies that align with an investor's risk tolerance and wealth level.
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