{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

LectureVIII - Lecture VIII Expected Utility Hypothesis...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture VIII: Expected Utility Hypothesis Basis for Applied Work I. From the Theory A. The von Nuemann-Morgenstern proof that consumers maximize expected income is based on basic tenants of consumer behavior. The proof was once harolded as a solid axiomatic proof near and dear to the hearts of mathematical economists. B. The expected utility maxim simply states that the consumer’s utility of a risky investment is equal to the expected utility of the possible outcomes: ( 29 ( 29 [ ] 1 ( ) ( ) N i i i U E U w U w f w dw or U w P w -∞ = = = = This maxim thus replaces an early belief that consumer’s maximize the expected value of the payoff: [ ] ( 29 [ ] 1 N i i i E w w f w dw or w P w -∞ = = = Notice that the older framework is a special case of the von Nuemann- Morgenstern framework {Risk Neutrality, or a linear utility function} C. Three attitudes toward risk: Notice that when we proved the linkage between lottery space and utility space we only required that the transformation U (.) be positive monotonic.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}