Utility Question
The utility question asks how valuable each possible outcome would be from a specified person’s perspective. That value must be considered alongside the probability of the outcome when comparing options.
THE IDEA
The Utility Question
In the fourth step, we assign a utility value to each option-outcome combination —each scenario—by asking the Utility Question: If we select this option, and this outcome occurs, what is the utility from the perspective of…? Applying the Utility Question to the first red bean option-outcome combination, we ask: If we bet on picking a red bean and we pick a red bean, what is the utility from the perspective of the bettor? Answer: Two dollars. We enter this value adjacent to the “Red” outcome in a column titled “Utility” (Figure 14-4). We then ask the Utility Question of the second red bean scenario (bet red, get yellow): If we bet on picking a red bean and we pick a yellow bean, what is the utility? Answer: Zero dollars. We ask the Utility Question of the seven remaining scenarios and enter their utilities.
The fact that the jelly bean outcomes are expressed in terms of dollars and cents makes calculating their utility easy, because we are accustomed to expressing values in monetary terms. Utilities can also represent values that are not monetary.
Which of the three options offers us the most benefit, the most utility? Obviously, the green bean, which is worth $4.00. But is green really the best option? Think about it. At the racetrack, do all bettors bet on the horse that offers the biggest return on their wager? Do all of them put money down to win on the filly paying 100 to 1? Of course not. They factor in the probability of winning. Probability. Ah, we’re back to that, are we? The green bean clearly offers us the greatest utility—the biggest prize—of the three options, but to make a reasoned, judicious bet we must factor in the probability of our picking a green bean.
The $4.00 prize tells us the value of winning on green. The probability of picking green tells us how likely we are to receive that $4.00. Neither figure alone tells us which bet is best. A large possible prize can distract us from a small chance of receiving it.
When to use it
Investment decisions: compare the values of possible gains and losses together with their probabilities.
Career choices: weigh salary, satisfaction, and lifestyle (utility) against the probability of achieving each outcome.
Medical decisions: evaluate treatment benefits and side effects (utility) with survival or recovery probabilities.
Business strategy: assess market entry options by estimating potential profits (utility) and likelihood of success.
FROM THEORY TO EVERYDAY LIFE
In practice
Jelly Bean Betting
A bettor wagers $1 on picking a jelly bean from a jar. Options: bet on red (win $2 if red, $0 otherwise), bet on yellow (win $3 if yellow, $0 otherwise), bet on green (win $4 if green, $0 otherwise). The utility values are the monetary prizes: $2, $3, $4, or $0. The question asks for the utility from the bettor's perspective for each option-outcome combination.
A MOMENT TO REFLECT
Put it to work.
Think of a recent decision you made. What were the possible outcomes? How did you assign utility to each? Did you consider the probabilities?
Why might people focus on utility (the prize) and ignore probability in high-stakes decisions? Give a real-life example.
How does the Utility Question change if you consider utility from the perspective of different stakeholders (e.g., customer, employee, society)?
CONTINUE THE CONVERSATION
Source texts
- The Thinkers Toolkit by Morgan D Jones