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Cube Root Utility Theory

In: Encyclopedia of Finance

Author

Listed:
  • Jack Clark Francis

    (Baruch College, CUNY)

Abstract

The von Neumann-Morgenstern (vNM) utility function suggested here has loss aversion and consistently increasing utility of wealth between −∞ and ∞. It is also concave over favorable outcomes and convex over unfavorable outcomes. The function contains a consistent preference for positively skewed outcomes. The weighted probabilities in Kahneman and Tversky’s (KT’s) cumulative prospect theory do not align with the vNM requirement that the probabilities sum to one; nevertheless, important advantages are gained from the vNM assumption.

Suggested Citation

  • Jack Clark Francis, 2022. "Cube Root Utility Theory," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 83, pages 1939-1962, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_84
    DOI: 10.1007/978-3-030-91231-4_84
    as

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