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  2. Expected utility hypothesis - Wikipedia

    en.wikipedia.org/wiki/Expected_utility_hypothesis

    The theory of subjective expected utility combines two concepts: first, a personal utility function, and second, a personal probability distribution (usually based on Bayesian probability theory). This theoretical model has been known for its clear and elegant structure and is considered by some researchers to be "the most brilliant axiomatic ...

  3. Lottery (decision theory) - Wikipedia

    en.wikipedia.org/wiki/Lottery_(decision_theory)

    In this case, the expected utility of Lottery A is 14.4 (= .90(16) + .10(12)) and the expected utility of Lottery B is 14 (= .50(16) + .50(12)) [clarification needed], so the person would prefer Lottery A. Expected utility theory implies that the same utilities could be used to predict the person's behavior in all possible lotteries. If, for ...

  4. Von Neumann–Morgenstern utility theorem - Wikipedia

    en.wikipedia.org/wiki/Von_Neumann–Morgenstern...

    In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.

  5. Risk aversion - Wikipedia

    en.wikipedia.org/wiki/Risk_aversion

    In expected utility theory, an agent has a utility function u(c) where c represents the value that he might receive in money or goods (in the above example c could be $0 or $40 or $100).

  6. Merton's portfolio problem - Wikipedia

    en.wikipedia.org/wiki/Merton's_portfolio_problem

    Merton's portfolio problem is a problem in continuous-time finance and in particular intertemporal portfolio choice.An investor must choose how much to consume and must allocate their wealth between stocks and a risk-free asset so as to maximize expected utility.

  7. St. Petersburg paradox - Wikipedia

    en.wikipedia.org/wiki/St._Petersburg_paradox

    This formula gives an implicit relationship between the gambler's wealth and how much he should be willing to pay (specifically, any c that gives a positive change in expected utility). For example, with natural log utility, a millionaire ($1,000,000) should be willing to pay up to $20.88, a person with $1,000 should pay up to $10.95, a person ...

  8. Exponential utility - Wikipedia

    en.wikipedia.org/wiki/Exponential_utility

    Consider the portfolio allocation problem of maximizing expected exponential utility [] of final wealth W subject to = ′ + (′) where the prime sign indicates a vector transpose and where is initial wealth, x is a column vector of quantities placed in the n risky assets, r is a random vector of stochastic returns on the n assets, k is a vector of ones (so ′ is the quantity placed in the ...

  9. Choquet integral - Wikipedia

    en.wikipedia.org/wiki/Choquet_integral

    A Choquet integral is a subadditive or superadditive integral created by the French mathematician Gustave Choquet in 1953. [1] It was initially used in statistical mechanics and potential theory, [2] but found its way into decision theory in the 1980s, [3] where it is used as a way of measuring the expected utility of an uncertain event.