Microsoft PowerPoint - PoF.ppt

Expected utility and expected value criterionƒ 51

Obviously the expected value criterion can be reconciled with the expected utility approach by using a

linear utility

function!

ƒ ƒ

Recall that a linear utility function

is equivalent to assuming risk

neutrality.

ƒ

Thus, given risk neutrality (i.e. a

linear utility function) the expected

utility criterion reduces to th

e expected value criterion.

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Single-period random cash

flows: Utility theory