existence of expected utility maximizing decisions when utility is unbounded

  • 12 Pages
  • 2.38 MB
  • 3201 Downloads
  • English
by
Dept. of Economics, McMaster University , Hamilton
Utility th
StatementJohn Kennan.
SeriesWorking paper / Department of Economics, McMaster University -- no. 79-15
The Physical Object
Pagination12 leaves ;
ID Numbers
Open LibraryOL22428471M

We consider a problem of expected utility maximization with an utility function finite on ℝ+ and with an unbounded random endowment in an abstract model of financial : Ruslan Khasanov. Download PDF: Sorry, we are unable to provide the full text but you may find it at the following location(s): ?si (external link)Author: John Kennan.

business schools!) is maximizing expected utility. In this discussion, we assumed that we have a set S of states, a set O of outcomes, and are choosing among acts (functions from states to outcomes). The good news: Savage showed that if a decision maker’s preference relation on acts satisfies certain postulates, she is acting as if she has a.

Marginal Utility Bernoulli argued that people should be maximizing expected utility not expected value u(x) is the expected utility of an amount Moreover, marginal utility should be decreasing The value of an additional dollar gets lower the more money you have For example u($0) = 0 u($,) = 10 u($1,) = 16File Size: KB.

This paper studies the problem of maximizing the expected utility of terminal wealth for a financial agent with an unbounded random endowment, and with a utility function which supports both. Existence of Utility Function Proposition.

Suppose that the rational preference relation on X Then, the utility maximization problem is expressed as, max x u(x) subject to px m and x 2X. good may be unbounded. Closedness, follows from the fact that B includes its boundary. (2) Note that the maximizing choice is independent of the.

H.A. Simon, in International Encyclopedia of the Social & Behavioral Sciences, Rationality as Utility Maximization. Utility maximization, the best developed formal theory of rationality, which forms the core of neoclassical economics, does not refer to the social context of action (see also Decision Theory: Classical).It postulates a utility function, which measures the degree to.

Finally, the existence of multiple types of utility must be acknowledged to raise potential quandaries for policy makers, at least in situations when decision utility diverges from experienced utility.

In such a situation, a person may choose an outcome with highest decision utility that fails to maximize their actual experienced utility. Total Utility. If we could measure utility, total utility would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period.

The higher a consumer’s total utility, the greater that consumer’s level of satisfaction. Panel (a) of Figure “Total Utility and Marginal Utility Curves” shows the. Arrow K J () The use of unbounded utility functions in expected-utility maximization: response.

Quarterly Journal of Econom pp. – CrossRef Google Scholar Arrow K J, Debreu G () Existence of an equilibrium for a competitive economy. 2 Expected Utility We start by considering the expected utility model, which dates back to Daniel Bernoulli in the 18th century and was formally developed by John von Neumann and Oscar Morgenstern () in their book Theory of Games and Economic Be-havior.

Remarkably, they viewed the development of the expected utility model. We introduce a linear space of finitely additive measures to treat the problem of optimal expected utility from consumption under a stochastic clock and an unbounded random endowment process.

In this way we establish existence and uniqueness for a large class of utility-maximization problems including the classical ones of terminal wealth or consumption, as well as the problems that depend on.

The expected utility hypothesis is a popular concept in economics, game theory and decision theory that serves as a reference guide for judging decisions involving uncertainty.

Download existence of expected utility maximizing decisions when utility is unbounded PDF

The theory recommends which option a rational individual should choose in a complex situation, based on his tolerance for risk and personal preferences. The expected utility of an agent's risky decision is the.

Expected Utility Maximization Define a utility function so choice under uncertainty maximizes the expected utility of wealth, E[u(w)].

We assume positive marginal utility. 1 Financial Economics Expected Utility Maximization Utility Unique Only up to Positive Linear Transformation For v(w)=a+bu(w),b >0, then E[v(w)]= a+bE[u(w)], so the two. Downloadable. We introduce a linear space of finitely additive measures to treat the problem of optimal expected utility from consumption under a stochastic clock and an unbounded random endowment process.

In this way we establish existence and uniqueness for a large class of utility-maximization problems including the classical ones of terminal wealth or consumption, as well as the problems. By suggesting a different dynamic programming argument than in Bartl [Bartl D () Exponential utility maximization under model uncertainty for unbounded endowments.

Ann.

Details existence of expected utility maximizing decisions when utility is unbounded PDF

Appl. Probab. 29(1)–], we are able to prove the existence of the optimal strategy and the convex duality theorem in our context with transaction costs. In the. We introduce a linear space of finitely additive measures to treat the problem of optimal expected utility from consumption under a stochastic clock and an unbounded random endowment process.

Description existence of expected utility maximizing decisions when utility is unbounded FB2

In this way we establish existence and uniqueness for a large class of utility-maximization problems including the classical ones of terminal wealth or.

When faced with several acts, the decision-maker will choose the one with the highest ‘expected utility’, where the expected utility of an act is the sum of the products of probability and utility over all possible consequences.

The introduction of the concept of expected utility is usually attributed to Daniel Bernoulli. He arrived at. Downloadable. This paper studies the problem of maximizing the expected utility of terminal wealth for a financial agent with an unbounded random endowment, and with a utility function which supports both positive and negative wealth.

We prove the existence of an optimal trading strategy within a class of permissible strategies -- those strategies whose wealth process is a supermartingale. Expected Utility Under Risk 6 Expected Utility Under Uncertainty and Subjective Probabilities 10 Bayesian Decision Theory and the Representation of Beliefs 23 Expected Utility Theory with Incomplete Preferences 30 Conclusion 3 7 References 38 Author’s personal copy.

necessary and sufficient for the expected-utility model in this con-text and, like DeGroot's and Ledyard's systems, does not necessarily imply that utility is bounded.

Generalizations and most of the 1. Ryan, "The Use of Unbounded Utility Functions in Expected-Utility Maximization: Comment," this Journal, LXXXVIII (Feb.

), In their book entitled Theory of Games and Economic Behavior, von Neumann and Morgenstern proved the following lovely result, often called the expected-utility theorem: Theorem 1.

Suppose that an agent’s preferences among outcomes satisfy Rules 1–4. Then there exists a utility function u(Ai) that assigns a. In decision theory, the von Neumann–Morgenstern (or VNM) utility theorem shows that, under certain axioms of rational behavior, a decision-maker faced with risky (probabilistic) outcomes of different choices will behave as if he or she is maximizing the expected value of some function defined over the potential outcomes at some specified point in the future.

The axioms allow P to contain nonsimple probability measures without necessarily implying that the utility function u is bounded.

Article information Source Ann. Statist. The problem is that utility maximization is unfalsifiable as an explanation of behavior. As I show more fully in my book entitled From Pleasure Machines to Moral Communities, utility maximization can fit any real-world evidence, including behavior that appears to suggest preference inconsistency.

CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): Savage’s subjective expected utility model. In his seminal book, The Foundations of Statistics, Savage () advanced a theory of decision making under uncertainty and used that theory to define choice-based subjective probabilities.

He intended these probabilities to express the decision maker’s beliefs, thereby. Expected utility, in decision theory, the expected value of an action to an agent, calculated by multiplying the value to the agent of each possible outcome of the action by the probability of that outcome occurring and then summing those concept of expected utility is used to elucidate decisions made under conditions of risk.

According to standard decision theory, when. A Rule for Maximizing Utility. This process of decision making suggests a rule to follow when maximizing utility. Since the price of T-shirts is twice as high as the price of movies, to maximize utility the last T-shirt chosen needs to provide exactly twice the marginal utility (MU) of the last movie.

Example: The Expected Utility Hypothesis • The expected utility for the possible two wealth situations are as follows: E(U(W a)) = U(W a) (for certain wealth) E(U(W b)) = p 1 * U(W 1) + p 2 * U(W 2) (for random wealth) Expected Utility Theory states that individual will choose between these two wealth opportunities (W a and W b) based on.

Abstract: This paper studies the problem of maximizing the expected utility of terminal wealth for a financial agent with an unbounded random endowment, and with a utility function which supports both positive and negative wealth.

We prove the existence of an optimal trading strategy within a class of permissible strategies - those strategies. Utility theory rests upon the idea that people behave as if they make decisions by assigning imaginary utility values to the original monetary values.

The decision maker sees different levels of monetary values, translates these values into different, hypothetical terms (“utils”), processes the decision in utility terms (not in wealth terms.an expected utility representation with utility function on prizes u: X → expected utility representation with another utility function on prizes v: X → 0 and b such that v() = au()+b.

5. An expected utility maximizing individual with wealth w will lose a.Utility Maximization under Model Uncertainty in Discrete Time Marcel Nutz Janu Abstract We give a general formulation of the utility maximization problem under nondominated model uncertainty in discrete time and show that an optimal portfolio exists for any utility function that is bounded from above.