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S-Shaped Utility

If an investor must choose between certain gain and an uncertain outcome with a higher expected value he will often choose certain gain. If it is a choice between a certain loss and an uncertain outcome with a lower expected value he will often choose the uncertain outcome. This behavior is captured by an S-shaped value function (Kahnemann and Tversky 1979), where investors are risk-seeking below a certain threshold, and risk-averse above it.


Category:Understanding the Software -> Optimization

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