Search results
Results From The WOW.Com Content Network
To explain risk aversion within this framework, Bernoulli proposed that subjective value, or utility, is a concave function of money. In such a function, the difference between the utilities of $200 and $100, for example, is greater than the utility difference between $1,200 and $1,100.
The power utility function occurs if < and =. The more special case of the isoelastic utility function, with constant relative risk aversion, occurs if, further, b = 0. The logarithmic utility function occurs for = as goes to 0.
Exponential Utility Function for different risk profiles. In economics and finance, exponential utility is a specific form of the utility function, used in some contexts because of its convenience when risk (sometimes referred to as uncertainty) is present, in which case expected utility is maximized.
For risk-averse or risk-loving agents, loss is measured as the negative of a utility function, and the objective function to be optimized is the expected value of utility. Other measures of cost are possible, for example mortality or morbidity in the field of public health or safety engineering.
1) VNM-utility is a decision utility: [2] it is that according to which one decides, and thus by definition cannot be something which one disregards. 2) VNM-utility is not canonically additive across multiple individuals (see Limitations), so "total VNM-utility" and "average VNM-utility" are not immediately meaningful (some sort of ...
Moreover, they have different risk attitudes towards gains (i.e. outcomes above the reference point) and losses (i.e. outcomes below the reference point) and care generally more about potential losses than potential gains (loss aversion). Finally, people tend to overweight extreme events, but underweight "average" events.
The utility function is convex for a risk-lover and concave for a risk-averse person (and subsequently linear for a risk-neutral person). [1] Subsequently, it can be understood that the utility function curves in this way depending on the individual's personal preference towards risk. [1]
They argued that the curvature of an individual's utility function differs based upon the amount of wealth the individual has. This variably curving utility function would thereby explain why an individual is risk-loving when he has more wealth (e.g., by playing the lottery) and risk-averse when he is poorer (e.g., by buying insurance). The ...