Strange Behavior of Risk-Averse Utility Functions Used With Prospects: A Puzzle and Its Solution

Jeremiah Allen

International Journal of Economics and Finance, 2026, vol. 18, issue 6, 40

Abstract: Risk-averse utility functions are monotonic in their main parameter - here that is α. But used with a prospect, the functions fall then rise as α rises from zero to one. This is true of three different risk-averse utility functions. I show this “puzzle”, then I explore why it occurs. Several explanations fail to explain the puzzle, but one does.

Date: 2026
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