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.
The Notes are available in either TeX DVI format or Adobe Portable Document Format (PDF), and the DVI file is much smaller.
TeX DVI format: The Notes in TeX DVI format are in a ZIP archive risk.zip (83,213 bytes). This contains the Notes in TeX DVI format, and this document will print or display using any TeX printer or display driver. (Right-click on the link to risk.zip to download it rather than display it in your web browser.)
Adobe PDF format: Download risk.pdf (216,899 bytes) and display or print using Adobe Acrobat Reader. Acrobat Reader are available free from Adobe Systems Incorporated . (Right-click on the link to risk.pdf to download it rather than display it in your web browser.) Note: When you print from Acrobat Reader, uncheck the option “Fit to page” on the Print dialog to increase the size of the printed type.
Last updated August 1, 2001.