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Utility Theory

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Utility Theory : 

  • A way of representing an individual’s preferences between two competing desires.

  • Individuals seek to reach their highest level of satisfaction or utility.

  • Individuals are generally risk-averse, that is, they require increasingly large increments of wealth to compensate them for increasing their risk.

  • Risk aversion = an unwillingness to pay as much as the expected value of a risky project to invest (or wager) in it.

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