The Role of Utility in the State-Preference Framework

Robert G. Bowman

Journal of Financial and Quantitative Analysis, 1975, vol. 10, issue 2, 341-352

Abstract: State-preference theory has developed as a choice-theoretic framework through which many problems of finance and economics dealing with time and uncertainty can be analyzed. Hirshleifer [3], [4], [5], [6] has used the approach to provide significant insights to areas such as production and exchange, investment decisions, and speculative behavior. However, the theory has not made progress in attempting to incorporate state-labeled utility functions into the body of the theory. This paper will develop a method of graphically and analytically allowing for differing utility functions across states. As a further step, the impact of belief-deviation upon the tangency optimum will be discussed. Finally, the significance of these findings upon the consideration of risk will be discussed.

Date: 1975
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