Utility assessment procedures for polynomial-exponential functions

Utility assessment procedures for polynomial-exponential functions

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Article ID: iaor1988290
Country: United States
Volume: 35
Issue: 6
Start Page Number: 597
End Page Number: 613
Publication Date: Dec 1988
Journal: Naval Research Logistics Quarterly
Authors:
Keywords: decision theory
Abstract:

This article develops a methodology for testing constant exchange risk properties and identifying an appropriate form for a decision maker’s utility function. These risk properties characterize six different utility functions which are sums of products of polynomials and exponential functions. Such functional forms are commonly used in decision analysis applications. The practical advantage of this methodology is that these constant exchange risk properties eliminate the usual arbitrariness in the selection of a parametric utility function and often reduce the data requirements for subsequent estimation. The procedure is straightforward to apply. The decision maker need only provide certainty equivalents for two-outcome gambles and determine the more-preferred gamble in paired comparisons. The technical details of the procedure can be handled by interactive computer software.

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