utility function


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Utility function

A mathematical expression that assigns a value to all possible choices. In portfolio theory, the utility function expresses the preferences of economic entities with respect to perceived risk and expected return.

Utility Function

The expression of desire in mathematical terms. Utility function is important in investing; it may show the usefulness of investing in some securities as opposed to different ones. For instance, a stock with low risk and a high return has a higher utility function than a stock with high risk and a low return. See also: Marginal Utility.

utility function

a function denoting the quantities of goods and services that an individual consumes, of the form:

where Ut = total utility and x1 ,x2 . products consumed.

In order to achieve CONSUMER EQUILIBRIUM, the individual will select a combination of products, in line with his preferences, that maximizes his TOTAL UTILITY from his given income. See

CARDINAL UTILITY, ORDINAL UTILITY, MARGINAL UTILITY utility maximization see CONSUMER EQUILIBRIUM.

References in periodicals archive ?
We construct Wald tests for the null hypotheses that the coefficient of relative risk aversion equals 0, 1, or 2: 0 indicates a linear utility function in terms of income; 1 indicates a logarithmic utility function; and 2 corresponds to a value often used in the literature, which indicates a higher degree of concavity.
The overall utility function values for each alternative can be obtained by the following equations:
Utility function (1) was formed by normalization of individual criteria of the alternatives matrix for avoiding probable situation when lacking value of individual utility function in relation to one criterion may be compensated by increasing values of individual utility function in relation to the other criterion.
That is, what utility function or demand equation should be used for estimating the welfare associated with the introduction of a new good?
The condition of applying the additive utility function is that the attributes should be additively independent.
It has also been posited that by including money in the utility function, this allows the precautionary and store of value motives to be examined (Holman 1998).
The observation of the wage-risk trade-off reveals VSL and makes the calibration of the utility function possible.
Since attitudes drive behavior of the "individual self" and norms (values) the behavior of the "collectivist self", it is reasonable to model market-related behavior (I) in an individualistic culture with a single dominant individual-level utility function and (2) in a collectivistic culture with dual individual-level and group-level utility functions.
From an economic policy perspective, the more important choice is not which utility function to use, but rather which definition of society is chosen.
The expected form utility function of the two proposed which measures investors' preference between different investment alternatives is the following:

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