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"There's no such thing as a "correct result" because people's preferences (utility) varies by individual." But there are incorrect results and setting U to any

"There's no such thing as a "correct result" because people's preferences (utility) varies by individual." But there are incorrect results and setting U to anything other than log (Wealth) results in an incorrect result. "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." I just told you that you can not use an utility function other than log (Wealth). Any other utility function you use will give you a mathematically incorrect result. The log (Wealth) term covers up the maths error, so it can't be changed to another term. If you want to do something like that then you need to use the maths from EE.

hntrader 6y ago
"Any other utility function you use will give you a mathematically incorrect result." Tell that to the drunk gambler who just empirically falsified your fantasy theory.
kgwgk 6y ago
What does “mathematically incorrect” mean? The role of the utility function in EUT is to represent the agents preferences. Preferences can be rational (i.e. consistent) and not be represented by the logarithm of wealth. If Mr. X has some amount to invest now to pay for his child’s college in five years it’s not “irrational” to opt for something less risky than taking a loan to get a leveraged equity investment. Mr. X may not care that his portfolio wouldn’t growth at the optimal highest possible rate if left untouched forever, if that’s what you mean by “mathematically incorrect result”. Mr. X doesn’t care about your idea of “correct result”, he cares about being reasonably certain to have enough money available in five years. Now, you tell me to use the maths from EE to find the “correct” utility functions. How can I use the maths from EE to select a portfolio if I want to take out a certain amount of money in five years?

hntrader 6y ago

"Any other utility function you use will give you a mathematically incorrect result." Tell that to the drunk gambler who just empirically falsified your fantasy theory.

kgwgk 6y ago

What does “mathematically incorrect” mean? The role of the utility function in EUT is to represent the agents preferences. Preferences can be rational (i.e. consistent) and not be represented by the logarithm of wealth. If Mr. X has some amount to invest now to pay for his child’s college in five years it’s not “irrational” to opt for something less risky than taking a loan to get a leveraged equity investment. Mr. X may not care that his portfolio wouldn’t growth at the optimal highest possible rate if left untouched forever, if that’s what you mean by “mathematically incorrect result”. Mr. X doesn’t care about your idea of “correct result”, he cares about being reasonably certain to have enough money available in five years. Now, you tell me to use the maths from EE to find the “correct” utility functions. How can I use the maths from EE to select a portfolio if I want to take out a certain amount of money in five years?