# Tag Info

## Hot answers tagged utility-theory

7

I believe you should look into the field of Utility Theory which aims to model how people actually understand and feel about gains and losses. Usually, the most interesting cases are when the outcomes of the experiment are actually random, or when the payment can occur at different times. A famous model for the utility function is Risk Aversion. You can ...

7

The von Neumann-Morgenstern utility axioms are normative criteria for rational choice. In contrast, he Artzner/Uryasev axioms are normative criteria that some argue must hold for any measure that aims to measure portfolio risk. What they have in common is simply that they are normative criteria. The substance of the axioms are different, however, since they ...

2

One approach is to use an exponential utility function: $U(x) = -e^{-\lambda x}$. Here, $\lambda$ records what is known as the absolute risk aversion. Exponential utility functions are nice because they have a wealth independence property (of course, this may be seen as a drawback). As we will see below, the initial capital $X$ plays no part in the ...

1

I agree with @MattWolf The graph you show is confusing and evil, it makes me feel dumb every time I look at it. So I inverted the axis. Now we see the familiar shape of an utility curve, discussed in your previous question. It is upward sloping at a declining rate. In this case $u$ takes the place of $R_p$ and the general form of mean variance utility is ...

1

The problem is to find the best functional form of the utility function plus estimate its parameters. A good starting point is the following draft chapter from an upcoming book which gives a good intuition and many examples: Preferences by Andrew Ang

1

See the paper "On the conditional value at risk Probability dependent utility function" by Alexandre Street, on Theory and Decision, 2010. It shows that the well know CVAR fails in the independence axiom but it also provides good insights for that. The CVAR (redefined for revenues and not for losses - see the above paper) is convex in the probability set. ...

Only top voted, non community-wiki answers of a minimum length are eligible