One-Switch Utility Functions and a Measure of Risk

One-Switch Utility Functions and a Measure of Risk

Consider the relative attractiveness to a decision maker of two financial gambles as the wealth of that individual varies. It may seem reasonable that either one alternative should be preferred for all wealth levels or that there exists a unique critical wealth level at which the decision maker swit...

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Veröffentlicht in:Management Science. - Institute for Operations Research and the Management Sciences, 1954. - 34(1988), 12, Seite 1416-1424
1. Verfasser: Bell, David E. (VerfasserIn)
Format: Online-Aufsatz
Sprache:English
Veröffentlicht: 1988
Zugriff auf das übergeordnete Werk:Management Science
Schlagworte:Decision Analysis Utility Theory Risk Discounting Economics Mathematics Behavioral sciences Business
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520 |a Consider the relative attractiveness to a decision maker of two financial gambles as the wealth of that individual varies. It may seem reasonable that either one alternative should be preferred for all wealth levels or that there exists a unique critical wealth level at which the decision maker switches from preferring one alternative to the other. Decreasing risk aversion is not sufficient for this property to hold: we identify the small class of utility functions for which it does. We show how the property leads naturally to a measure of risk. The results of this paper apply equally well to discounting functions for cash flows: one-switch discount functions permit at most one change in preference between cash flows as all payoffs are deferred in time. 
540 |a Copyright 1988 The Institute of Management Sciences 
650 4 |a Decision Analysis 
650 4 |a Utility Theory 
650 4 |a Risk 
650 4 |a Discounting 
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650 4 |a Economics  |x Microeconomics  |x Economic utility  |x Utility functions 
650 4 |a Economics  |x Economic disciplines  |x Financial economics  |x Finance  |x Financial management  |x Financial risk 
650 4 |a Economics  |x Economic disciplines  |x Financial economics  |x Finance  |x Financial analysis  |x Risk management  |x Risk preferences  |x Risk aversion preference 
650 4 |a Economics  |x Microeconomics  |x Economic utility  |x Expected utility 
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650 4 |a Behavioral sciences  |x Psychology  |x Cognitive psychology  |x Intuition 
650 4 |a Economics  |x Economic disciplines  |x Financial economics  |x Banking  |x Central banking  |x Federal Reserve System  |x Discounting 
650 4 |a Mathematics  |x Pure mathematics  |x Probability theory  |x Randomness 
650 4 |a Business  |x Business economics  |x Corporate finance  |x Cash flow 
655 4 |a research-article 
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952 |d 34  |j 1988  |e 12  |h 1416-1424