Microsoft PowerPoint - PoF.ppt

(lu) #1
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.

(

) ()
[]

()

i

n i

i

i

n i

i

w p w u p w u E

w

w
u



=

=

=

=
=

1

1

Single-period random cash


flows: Utility theory

Free download pdf