Utility function for monetary gains (and losses) satisfying Friedman-Savage hypothesis

  • Somdeb Lahiri Ex-Professor PD Energy University, India

Abstract




In this note we provide a closed form utility function for gains that is S-shaped around the origin and satisfies the Friedman-Savage hypothesis. We obtain the corresponding Arrow–Pratt measure of absolute risk aversion (ARA) as well as Arrow–Pratt measure of relative risk aversion (RRA) for it.




References

[1] Armstrong, J. and D. Brigo (2018): Optimizing S-shaped utility and implications for risk management. (January 30, 2018 version): Available at https://arxiv.org/pdf/1711.00443.pdf
[2] Eeckhoudt, L., C. Gollier and H. Schlesinger (2005): “Economic and Financial Decisions Under Risk". Princeton University Press, NJ.
[3] Friedman, M. and L.J. Savage (1948): The Utility Analysis of Choices Involving Risk. Journal of Political Economy. Volume 56, No:4, pages 279-304.
[4] March, J.G. and Z. Shapira (1987): Managerial Perspectives on Risk and Risk Taking. Management Science. Volume 33, No: 11, pages 1404-1418.
[5] Wakker, P. (2010): \Prospect Theory: for Risk and Ambiguity". Cambridge University Press, Cambridge.
Published
2022-06-30
How to Cite
LAHIRI, Somdeb. Utility function for monetary gains (and losses) satisfying Friedman-Savage hypothesis. Journal of Mathematical Economics and Finance, [S.l.], v. 8, n. 1, p. 23 - 30, june 2022. ISSN 2458-0813. Available at: <https://journals.aserspublishing.eu/jmef/article/view/7165>. Date accessed: 02 oct. 2022. doi: https://doi.org/10.14505/jmef.v8.1(14).02.