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The expected utility hypothesis is a foundational assumption in mathematical economics concerning decision making under ... to calculate the probability of an event ...
The standard way to model how people choose under uncertain condition, is by using expected utility. In order to calculate expected utility, a utility function 'u' is developed in order to translate money into Utility. [1] Therefore, if a person has ' ' money, their utility would be (). This is explored further when investigating potential ...
In economics, Epstein–Zin preferences refers to a specification of recursive utility. A recursive utility function can be constructed from two components,: a time aggregator that characterizes preferences in the absence of uncertainty and a risk aggregator that defines the certainty equivalent function that characterizes preferences over static gambles and is used to aggregate the risk ...
This is the expected utility hypothesis. As stated, the hypothesis may appear to be a bold claim. The aim of the expected utility theorem is to provide "modest conditions" (i.e. axioms) describing when the expected utility hypothesis holds, which can be evaluated directly and intuitively:
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]
Sometimes, the equivalent problem of minimizing the expected value of loss is considered, where loss is (–1) times utility. Another equivalent problem is minimizing expected regret. "Utility" is only an arbitrary term for quantifying the desirability of a particular decision outcome and not necessarily related to "usefulness."
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 ...
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.