# Questions tagged [expected-utility]

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### The efficient frontier in mean variance criterion

The efficient frontier is the portfolios with the minimum of variance ($V$) at a given mean ($E$) or a maximum of mean at a given variance，Why do the optimal portfolios in the effcient frontier, is ...
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### Need help with Wakker (2010) on arbitrage

In Prospect Theory (2010; Cambridge UP), Peter P. Wakker has an exercise assignment 3.3.6 without solution in the book and I'm really unsure about this one. The exercise states on pages 76-77: ...
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### Numerical Backward Induction Optimal portfolio choice

I am currently considering a simple life-cycle problem. We consider a market with equity risk only, which follows a geometric Brownian motion. We seek to maximize the terminal wealth of a CRRA utility ...
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### Calculating risk interest rate within a two period model

I am trying to calculate how to determine the interest rate ( = risk free rate + premium) within the following model where a consumer decides to invest in a safe asset or in a risky asset. The utility ...
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### Should the “value function” be “utility function” in prospect theory?

I have a background in mathematics rather than economics, and currently reading Choices, Values, and Frames. The paper defines a "hypothetical value function" (the s-shape that is concave ...
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### Fair value that a risk averse individual would pay to enter a gamble

Introduction Assuming an individual (or corporation) with risk aversion and a von Neumann-Morgenstern utility curve and given a gamble g with E(g) > 0. From what I researched, certainty equivalent is ...
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### Understanding Rabin's Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion

I am trying to understand Rabin's Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion. I am struggling to completely understand the following: Suppose you have initial wealth of $W$...
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### Diminishing mariginal utility and risk preferences

Diminishing marginal utility is a concept only in cardinal utility theory rather than ordinal utility theory. As diminishing marginal utility implies a concave shape of the utility function, does it ...
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### Lotteries and expected utility

Suppose we have the following four lotteries: $L_{1}=[(1,\$1)]L_{2}=[(0.01,\$0),(0.89,\$1),(0.1,\$5)]$ $L_{3}=[(0.9,\$0),(0.1,\$5)]$ $L_{4}=[(0.89,\$0),(0.11,\$1)]$ If our agent says that he ...
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### Expected values vs uncertainty

Most models I have seen use expected values. Why is this a better economic model than uncertainty and economic agents thus having to make 'best guesses', with the result of 'animal spirits' playing a ...
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### Literature on Recursive Preferences and Time-Additive Expected Utility

In Chapter 20 of the book Economic Dynamics in Discrete Time, named "Recursive Utility", the author asserts that the Time-Additive Expected Utility Model (TAEU) has some shortcomings when applied to ...
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### Is there a dutch book argument for the “independence of irrelevant alternatives” axiom?

There is a dutch book argument to show that nontransitive preferences are in a sense "unreasonable", which justifies why we pose the axiom of transitivity in the definition of "rational preferences", ...
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### How to calculate Shapley Value with uncertainty?

So I'm trying to estimate a Shapley value in a game with uncertain payoffs. Specifically, imagine a game where the payoff function as as follows ...