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Strange Behavior of Risk-Averse Utility Functions Used With Prospects: A Puzzle and Its Solution

Author

Listed:
  • Jeremiah Allen

Abstract

Risk-averse utility functions are monotonic in their main parameter - here that is α. But used with a prospect, the functions fall then rise as α rises from zero to one. This is true of three different risk-averse utility functions. I show this “puzzle”, then I explore why it occurs. Several explanations fail to explain the puzzle, but one does.

Suggested Citation

  • Jeremiah Allen, 2026. "Strange Behavior of Risk-Averse Utility Functions Used With Prospects: A Puzzle and Its Solution," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 18(6), pages 1-40, June.
    • Handle: RePEc:ibn:ijefaa:v:18:y:2026:i:6:p:40
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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