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Utility assessment procedures for polynomial‐exponential functions

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  • Peter H. Farquhar
  • Yutaka Nakamura

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.

Suggested Citation

  • Peter H. Farquhar & Yutaka Nakamura, 1988. "Utility assessment procedures for polynomial‐exponential functions," Naval Research Logistics (NRL), John Wiley & Sons, vol. 35(6), pages 597-613, December.
    • Handle: RePEc:wly:navres:v:35:y:1988:i:6:p:597-613
    DOI: 10.1002/1520-6750(198812)35:63.0.CO;2-Z
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    References listed on IDEAS

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    1. Jehoshua Eliashberg & John R. Hauser, 1985. "A Measurement Error Approach for Modeling Consumer Risk Preference," Management Science, INFORMS, vol. 31(1), pages 1-25, January.
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    3. Johann Pfanzag, 1959. "A general theory of measurement applications to utility," Naval Research Logistics Quarterly, John Wiley & Sons, vol. 6(4), pages 283-294, December.
    4. Hassett, Matt & Stephen Sears, R. & Trennepohl, Gary L., 1985. "Asset preference, skewness, and the measurement of expected utility," Journal of Economics and Business, Elsevier, vol. 37(1), pages 35-47, February.
    5. Rothblum, Uriel G., 1975. "Multivariate constant risk posture," Journal of Economic Theory, Elsevier, vol. 10(3), pages 309-332, June.
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    9. Ohlson, James A. & Kallio, Markku, 1975. "A Note on the Representation of Bounded Utility Functions Defined on [a, ∞)," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(2), pages 377-379, June.
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    Cited by:

    1. Craig W. Kirkwood, 2004. "Approximating Risk Aversion in Decision Analysis Applications," Decision Analysis, INFORMS, vol. 1(1), pages 51-67, March.

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