Questions tagged [utility]

For all questions involving utility functions as used in economics and decision theory, including study of their properties or how they can be used to represent preferences.

A utility function is a numerical representation of an agent’s preferences. If $\succeq$ is a preference relation on a set of alternatives $X$, then the function $u: X\to\mathbb{R}$ is a utility representation of $\succeq$ if $x\succeq y$ holds if and only if $u(x)\ge u(y)$. In many cases, one might want the representation to be of a special form. For example, if $X$ is the set of probability distributions on a finite set $F=\{y_1,\ldots,y_n\}$ so that $x=(p_1,\ldots,p_n)$, then an expected utility representation of $\succeq$ is of the form $$u(x)=\sum_{i=1}^n p_iv(y_i)$$ for some function $v:F\to\mathbb{R}$.

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Curvature and the Arrow Pratt Absolute Risk Coefficient

So I'm in my first year of grad school, and I'm taking a decision analysis course. One of the topics we're covering is risk aversion, and with that comes discussion of the Arrow Pratt Absolute Risk Aversion coefficient. I know that this coefficient…
Patrick
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What does Arrow's theorem say about Kaldor-Hicks social welfare functions with von Neumann-Morgenstern utility?

Let $A$ be the set of all possible states of the world, let $G(A)$ be the set of all "lotteries" or "gambles", i.e. the set of all probability distributions over $A$. Now consider an individual with a preference ordering of the various lotteries in…
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Philosophically motivated risk metrics

During a random process over a sample space $\Omega$, an agent incurs a cost (say, in money) given by a random variable $Z:\Omega \rightarrow R$, which is determined by the agent's action. The agent chooses the action which minimizes its "risk",…
Frank Seidl
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stochastic dominance

A group of people are choosing between two investments A and B. Both have these payoff distributions: A: $$\langle.2, .1, .2, .4, .1 \mid 1, 2, 3, 4, 5\rangle$$ B: $$\langle.1, .3, .1, .3, .2 \mid 1, 2, 3, 4, 5\rangle$$ (IE for A, there is a .2…
Matt
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Game holder is always losing money in the St. Petersberg Paradox?

The St. Petersberg Paradox is described as follows: A gambler pays an entry fee $M$ dollar to play the following game: A fair coin is tossed repeated until the first head occurs and you win $2^{n-1}$ amount of money where $n$ is the total number of…
Jerry
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Deriving demand functions given utility

A consumer purchases food $X$ and clothing $Y$. Her utility function is given by: $U(X,Y) = XY +10Y$, income is $\$100$ the price of food is $\$1$ and the price of clothing is $P_y$. Derive the equation for the consumer’s demand function for…
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Authoritative measure for rating photos in a photo contest - practical issue

I am trying to find a good algorithm that would serve as an authoritative way to assess pictures provided for a photo contest. There is a bunch of photos that came for the contest. Each person from a group of people gets all of the photos to mark…
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Mistake in Wikipedia article on St Petersburg paradox?

I suspect that there is a mistake in the Wikipedia article on the St Petersburg paradox, and I would like to see if I am right before modifying the article. In the section "Solving the paradox", the formula for computing of the expected utility of…
Martin Van der Linden
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Maximum amount willing to gamble given utility function $U(W)=\ln(W)$ and $W=1000000$ in the game referred to in St. Petersberg's Paradox?

The game works as such: I flip a fair coin until it lands on tails. $h$ is the number of heads obtained until the first tail occurs and the game stops. My payoff from this game is: $\hat G=2^{h}$ I have a utility function $u(W)=\ln(W)$ and…
Jess
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Determine all values $\lambda$ for which $\mu \succ 0 \succ \upsilon$

Suppose an investor has a preference represented by the relation $\succ$ for which there is a von-Neumann Morgenstern representation with the utility function $u$: $$u(x)=\begin{cases} x & x\ge 0 \\ \lambda x &x<0 \end{cases}$$ Determine all values…
dsk62
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Closed form for sum of $\ln(x+2^n)/2^n$ from $n=1$ to $\infty$

Is there a closed form for the following sum, where $x>0$? $$\sum_{n=1}^{\infty} \frac{\ln(x+2^n)}{2^n}$$ The sum pops up when considering the expected utility of a game where one receives $\$2^n$ if the first head occurs on the $n^{th}$ flip of a…
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Preference Relation and Utility Function - Problem with inductive proof

I have a problem with an inductive proof of the following result. Theorem: If $X$ is a finite set, a binary relation $\succ$ is a preference relation iff there exist a function $u:X\rightarrow R$ such that $$ x \succ y…
Kolmin
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Does the von Neumann-Morgenstern utility theorem work for infinitely many outcomes?

The von Neumann-Morgenstern utility theorem is easy to prove for a finite number of outcomes. Is it still true for an infinite number of outcomes? With infinite outcomes, a lottery can now be any probability distribution on the set of outcomes. The…
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What is log-utility?

I came across this problem today: Calculate the log-utility optimal fraction of your capital to bet on a fair coin flip where you win $x$ on heads and lose $y$ on tails. What is the meaning of log-utility in log-utility optimal fraction? Is this…
user107224
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How to prove that there exist a concave function and $\gamma\in[0,1]$ and some other numbers which satisfy an inequality

I'm working on an economics paper, and in the model I've made I've basically gotten myself a little bit stuck. I need to show that there exists a nondecreasing concave function $u$ and numbers $P$ and $\theta$ with $P>\theta>0$, and $\gamma\in[0,1]$…
crf
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