Slides14-2010 - Outline Closed Form Solutions Negative...

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Outline Closed Form Solutions Negative Exponential Utility Function Power Utility Function Closed Form Solutions to Expected Utility: Lecture XIV Charles B. Moss September 21, 2010 Charles B. Moss Closed Form Solutions
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Outline Closed Form Solutions Negative Exponential Utility Function Power Utility Function Closed Form Solutions Class I Negative Exponential Utility Function Power Utility Function Charles B. Moss Closed Form Solutions
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Outline Closed Form Solutions Negative Exponential Utility Function Power Utility Function Class I Closed Form Solutions I By the von Neumann and Morgenstern proof we conclude that decision makers choose those decisions in a way that maximizes their expected utility. I We conclude that decision makers prefer more expected utility to less. I We use a variety of algebraic structures for utility that are positively monotonic and concave. I The Cobb-Douglas speciFcation of utility yields an indirect utility function which is close to the power utility function. U ( Y )= Y 1 r 1 r (1) I To complete our problem we add information about the distribution function. I Following our discussion not expectations are closed form (i.e., have analytical solutions).
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Slides14-2010 - Outline Closed Form Solutions Negative...

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