The Risk Neutral Utility Function
Choice under uncertainty is often characterized as the maximization of expected utility. Utility is often assumed to be a function of profit or final portfolio wealth, with a positive first derivative. The utility function whose expected value is maximized is concave for a risk averse agent, convex for a risk lover, and linear for a risk neutral agent. Thus in the risk neutral case, expected utility of wealth is simply equal to a linear function of expected wealth, and maximizing it is equivalent to maximizing expected wealth itself.
Read more about this topic: Risk Neutral
Famous quotes containing the words risk, neutral, utility and/or function:
“The risk for a woman who considers her helpless children her “job” is that the children’s growth toward self-sufficiency may be experienced as a refutation of the mother’s indispensability, and she may unconsciously sabotage their growth as a result.”
—Letty Cottin Pogrebin (20th century)
“The United States must be neutral in fact as well as in name.... We must be impartial in thought as well as in action ... a nation that neither sits in judgment upon others nor is disturbed in her own counsels and which keeps herself fit and free to do what is honest and disinterested and truly serviceable for the peace of the world.”
—Woodrow Wilson (1856–1924)
“Moral sensibilities are nowadays at such cross-purposes that to one man a morality is proved by its utility, while to another its utility refutes it.”
—Friedrich Nietzsche (1844–1900)
“Uses are always much broader than functions, and usually far less contentious. The word function carries overtones of purpose and propriety, of concern with why something was developed rather than with how it has actually been found useful. The function of automobiles is to transport people and objects, but they are used for a variety of other purposes—as homes, offices, bedrooms, henhouses, jetties, breakwaters, even offensive weapons.”
—Frank Smith (b. 1928)