Communications to the Editor—A Note on Utility and Attitudes to Risk

Abstract

Most theories of economic decision-making under uncertainty recognize that the value assigned to an uncertain prospect may differ from its “actuarial value,” or that the utility of an expectation may differ from the expectation of the utility. One way of formalizing this idea is to assume that the utility of a prospect is given by a function f ( E , V ), where E = the mathematical expectation of the gain, V = the variance of the gain. Various considerations about existence and possible shape of such function f ( E , V ) are presented.