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One use of the indirect utility concept is the notion of the utility of money. The (indirect) utility function for money is a nonlinear function that is bounded and asymmetric about the origin. The utility function is concave in the positive region, representing the phenomenon of diminishing marginal utility. The boundedness represents the fact ...
A single-attribute utility function maps the amount of money a person has (or gains), to a number representing the subjective satisfaction he derives from it. The motivation to define a utility function comes from the St. Petersburg paradox: the observation that people are not willing to pay much for a lottery, even if its expected monetary gain is infinite.
In decision theory, subjective expected utility is the attractiveness of an economic opportunity as perceived by a decision-maker in the presence of risk.Characterizing the behavior of decision-makers as using subjective expected utility was promoted and axiomatized by L. J. Savage in 1954 [1] [2] following previous work by Ramsey and von Neumann. [3]
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.
The utility function u(c) is defined only up to positive affine transformation – in other words, a constant could be added to the value of u(c) for all c, and/or u(c) could be multiplied by a positive constant factor, without affecting the conclusions. An agent is risk-averse if and only if the utility function is concave.
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 ...
In mental accounting theory, the framing effect defines that the way a person subjectively frames a transaction in their mind will determine the utility they receive or expect. [11] The concept of framing is adopted in prospect theory , which is commonly used by mental accounting theorists as the value function in their analysis (Richard Thaler ...
If the two concert prices are the same, the consumer is completely indifferent and may flip a coin to decide. To see this mathematically, differentiate the utility function to find that the MRS is constant - this is the technical meaning of perfect substitutes. As a result of this, the solution to the consumer's constrained maximization problem ...