ON THE CONCAVITY AND QUASICONCAVITY PROPERTIES OF ( σ, μ ) UTILITY FUNCTIONS

Fatma Lajeri-Chaherli

Bulletin of Economic Research, 2016, vol. 68, issue 3, 287-296

Abstract: type="main">

Concavity and quasiconcavity have always been important properties in financial economics particularly in decision problems when an objective function has to be maximized over a convex set. Both properties have mainly been used as purely technical assumptions. In this paper, we link concavity and quasiconcavity of a ( σ , μ ) utility function to the basic concepts of risk aversion, prudence, risk vulnerability and temperance. We show that concavity means the agent is more risk vulnerable than prudent. In particular, we can see when a function is both concave and quasiconcave and when it is only quasiconcave.

Date: 2016
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