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:
“Any time you take a chance you better be sure the rewards are worth the risk because they can put you away just as fast for a ten dollar heist as they can for a million dollar job.”
—Stanley Kubrick (b. 1928)
“The lonely Earth amid the balls
That hurry through the eternal halls,
A makeweight flying to the void,
Supplemental asteroid,
Or compensatory spark,
Shoots across the neutral Dark.”
—Ralph Waldo Emerson (1803–1882)
“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)
“To look backward for a while is to refresh the eye, to restore it, and to render it the more fit for its prime function of looking forward.”
—Margaret Fairless Barber (1869–1901)