These notes summarize useful concepts for analyzing attitude toward risk taking in decision analysis. The exponential utility function is emphasized, and conditions are reviewed under which this utility function form is appropriate. Tables are presented that aid in using the exponential utility function, including finding the value of the risk tolerance. The use of the exponential utility function is considered in analyzing portfolio decisions and determining the value of perfect information. The accuracy is considered of an approximate formula for determining certainty equivalents when the exponential utility function holds. Exercises on this material are also included.
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Last updated November 11, 2017.