Awarded the 2001 Paul A. Samuelson Award presented by the TIAA-CREF
Institute for Outstanding Scholarly Writing on Lifelong Financial
Security This book updates and advances the theory of expected
utility as applied to risk analysis and financial decision making.
Von Neumann and Morgenstern pioneered the use of expected utility
theory in the 1940s, but most utility functions used in financial
management are still relatively simplistic and assume a
mean-variance world. Taking into account recent advances in the
economics of risk and uncertainty, this book focuses on richer
applications of expected utility in finance, macroeconomics, and
environmental economics. The book covers these topics: expected
utility theory and related concepts; the standard portfolio problem
of choice under uncertainty involving two different assets; P the
basic hyperplane separation theorem and log-supermodular functions
as technical tools for solving various decision-making problems
under uncertainty; s choice involving multiple risks; the
Arrow-Debreu portfolio problem; consumption and saving; the
equilibrium price of risk and time in an Arrow-Debreu economy; and
dynamic models of decision making when a flow of information on
future risks is expected over time. The book is appropriate for
both students and professionals. Concepts are presented intuitively
as well as formally, and the theory is balanced by empirical
considerations. Each chapter concludes with a problem set.
General
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