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Okay so let me cut this down. EE shows that EUT only gives correct results when U = log (Wealth), that means as soon as you set U to anything other than log (W

Okay so let me cut this down. EE shows that EUT only gives correct results when U = log (Wealth), that means as soon as you set U to anything other than log (Wealth), it is no longer giving correct results. So it would be fair to say EUT also has no concept of utility.

kgwgk 6y ago
How do you define "correct results"? Talking about portfolio selection, for example, the EE - a.k.a. U=log(wealth) - solution may be the "correct solution" to the "we never spend a dollar problem and we have an infinite horizon" problem. But EE cannot get any results, correct or otherwise, for many other problems that are much more interesting where EUT can be applied. Like investment decisions when your horizon is not infinite and you intend to use the money at some point.
hntrader 6y ago
You misunderstand the concept of subjective utility. There's no such thing as a "correct result" because people's preferences (utility) varies by individual. What's "correct" for a risk-seeking gambler is very different to what's "correct" for an investor who's trying to build generational wealth. That's why we have a U(x) to begin with. Without addressing this concept, you're no longer attempting to describe reality, you're making a prescriptive normative assertion that everyone should follow a specific strategy of your choosing.
kgwgk 6y ago
> EE shows that EUT only gives correct results when U = log (Wealth) You seem to think that this invalidates EUT. On the contrary, it's a vindication of EUT. In that particular case, EUT works and the preferences of the agent would be correctly described by that particular utility function. Otherwise you wouldn't say that EE and U=log(w) give "correct results". It can also happen in other cases that EE cannot be used to explain the preferences of the agent while EUT is still applicable because a utility function (maybe logarithmic, maybe not) can be found which describes them adequately.

kgwgk 6y ago

How do you define "correct results"? Talking about portfolio selection, for example, the EE - a.k.a. U=log(wealth) - solution may be the "correct solution" to the "we never spend a dollar problem and we have an infinite horizon" problem. But EE cannot get any results, correct or otherwise, for many other problems that are much more interesting where EUT can be applied. Like investment decisions when your horizon is not infinite and you intend to use the money at some point.

hntrader 6y ago

You misunderstand the concept of subjective utility. There's no such thing as a "correct result" because people's preferences (utility) varies by individual. What's "correct" for a risk-seeking gambler is very different to what's "correct" for an investor who's trying to build generational wealth. That's why we have a U(x) to begin with. Without addressing this concept, you're no longer attempting to describe reality, you're making a prescriptive normative assertion that everyone should follow a specific strategy of your choosing.

kgwgk 6y ago

> EE shows that EUT only gives correct results when U = log (Wealth) You seem to think that this invalidates EUT. On the contrary, it's a vindication of EUT. In that particular case, EUT works and the preferences of the agent would be correctly described by that particular utility function. Otherwise you wouldn't say that EE and U=log(w) give "correct results". It can also happen in other cases that EE cannot be used to explain the preferences of the agent while EUT is still applicable because a utility function (maybe logarithmic, maybe not) can be found which describes them adequately.