A contribution to theory of utility functions

  • Eva Vaněčková University of South Bohemia in České Budějovice
Keywords: decision making under risk, decision maker's attitude toward risk, utility function, certainty

Abstract

The paper deals with two specific types of utility functions displaying decision maker's risk aversion at expressing the utility of monetary values. These functions are following: w(c) = 1 – e-x/R, u(x) = ln(x + R), where x is a monetary value and R is a constant expressing the degree of risk tolerance. Basic properties of the above mentioned functions and formulas for calculations of certainty equivalents and risk premiums are derived. Some properties of the analyzed functions are numerically and graphically illustrated by concrete examples.
Published
2012-08-30
Section
Articles