Alternative utility functions: review, analysis and comparison

Arie Harel (), Jack Clark Francis () and Giora Harpaz ()
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Arie Harel: City University of New York (CUNY)
Jack Clark Francis: City University of New York (CUNY)
Giora Harpaz: City University of New York (CUNY)

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 3, No 8, 785-811

Abstract: Abstract The paper reviews the development of von Neumann and Morgenstern (vNM) utility theory. Kahneman and Tversky’s (KT’s) prospect theory is introduced. The vNM utility function is compared and contrasted with KT’s value function. We prove the uniqueness of two popular utility functions. First, we show that all power utility functions possess constant RRA. And, we show that all exponential utility functions have constant ARA. The paper concludes by discussing applications, strengths and weaknesses of various utility functions.

Keywords: von Neumann–Morgenstern (vNM) utility theory; Expected utility theory; Kahneman and Tversky (KT); Prospect theory; Framing; Loss aversion; Risk aversion; Risk taking; Absolute risk aversion (ARA); Relative risk aversion (RRA); Subjective probabilities; Decision weights; Objective probabilities; Probability weighting (search for similar items in EconPapers)
JEL-codes: D81 G02 G10 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11156-017-0688-z

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