Risk, return, and utility

Article Abstract:

Expected utility theory is widely accepted as the benchmark economic approach to decision making that involves risks. However, one major shortcoming of this theory is that it does not clarify the role of the concepts of risk and return. The case of an individual who has to choose from among a wide variety of financial alternatives with uncertain payoffs is considered to demonstrate the application of a more useful model that takes into account the return and risk of an alternative. It is shown that there is a broad range of utility functions that are compatible with a risk-return interpretation. These utility functions are then used to derive measures of risk that are utility-compatible.

Models, Analysis, Return on investment, Investment analysis, Securities analysis, Rate of return, Utility theory, Utility functions

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The value of pre-decision side bets for utility maximizers

Article Abstract:

The potential value of pre-decision side bets for certain types of decision makers is examined. Results indicate that it is better to enter into independent side bets prior to making a decision than rejecting or accepting alternatives outright when the alternatives are acceptable at certain wealth levels.

Research, Decision-making, Decision making

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