Search results
Results from the WOW.Com Content Network
When faced with several alternatives, the person will choose the alternative with the highest utility. The utility function is not visible; however, by observing the choices made by the person, we can "reverse-engineer" his utility function. This is the goal of revealed preference theory. [citation needed] In practice, however, people are not ...
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]
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.
Standard utility functions represent ordinal preferences. The expected utility hypothesis imposes limitations on the utility function and makes utility cardinal (though still not comparable across individuals). Although the expected utility hypothesis is standard in economic modeling, it is violated in psychological experiments.
The strongest independence property is called additive independence.Two attributes, 1 and 2, are called additive independent, if the preference between two lotteries (defined as joint probability distributions on the two attributes) depends only on their marginal probability distributions (the marginal PD on attribute 1 and the marginal PD on attribute 2).
Exponential utility implies constant absolute risk aversion (CARA), with coefficient of absolute risk aversion equal to a constant: ″ ′ =. In the standard model of one risky asset and one risk-free asset, [1] [2] for example, this feature implies that the optimal holding of the risky asset is independent of the level of initial wealth; thus on the margin any additional wealth would be ...
Isoelastic utility for different values of . When > the curve approaches the horizontal axis asymptotically from below with no lower bound.. In economics, the isoelastic function for utility, also known as the isoelastic utility function, or power utility function, is used to express utility in terms of consumption or some other economic variable that a decision-maker is concerned with.
In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. how much better or worse one outcome is compared to another. [1] In consumer choice theory, economists originally attempted to replace cardinal utility with the apparently weaker concept of ordinal utility.