Cube Root Utility Theory

Jack Clark Francis (jack@jcfrancis.com)
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Jack Clark Francis: Baruch College, CUNY

Chapter 83 in Encyclopedia of Finance, 2022, pp 1939-1962 from Springer

Abstract: Abstract The von Neumann-Morgenstern (vNM) utility function suggested here has loss aversion and consistently increasing utility of wealth between −∞ and ∞. It is also concave over favorable outcomes and convex over unfavorable outcomes. The function contains a consistent preference for positively skewed outcomes. The weighted probabilities in Kahneman and Tversky’s (KT’s) cumulative prospect theory do not align with the vNM requirement that the probabilities sum to one; nevertheless, important advantages are gained from the vNM assumption.

Keywords: Utility function; Kahneman-Tversky prospect theory; Cube root function; von Neumann-Morgenstern (vNM) utility theory; Radical function; Risk aversion; Loss aversion; Absolute risk aversion; Relative risk aversion (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-3-030-91231-4_84

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