Comparing financial investments by their state dependent returns: A one-way log utility representation

Gerhard Speckbacher

European Journal of Operational Research, 2009, vol. 193, issue 1, 323-326

Abstract: In a standard single-period model under risk, we formalize and discuss an intuitive criterion for the binary comparison of financial investments. Two investments - x and y - are compared by calculating the present value of x's payoffs using the state dependent returns of y as discount factors. The induced preference is asymmetric but exhibits intransitive indifference. If the feasible set is convex, then the criterion selects a unique maximum element. Interestingly, it can be shown that the induced preference can be represented by a one-way expected utility representation employing logarithmic utility. Besides giving a relevant and illustrative example for a one-way utility representation, this result provides a new interpretation of using logarithmic utility for expected utility based decision-making.

Keywords: State; dependent; opportunity; costs; One-way; utility; representation; Logarithmic; utility; Intransitive; indifference (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:193:y:2009:i:1:p:323-326

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