Evaluation of Subjective Utility Function Parameters

  • Е.В. Данько Altai State University Email: evdanko88@gmail.com
DOI_disc_logo https://doi.org/10.14258/izvasu(2017)1-12
Keywords: evaluation of decision utility, risk aversion, loss of profit, expected utility function, evaluation of individual decision-maker characteristics, evaluation of investment results

Abstract

The paper presents a method of quantitative evaluation of subjective utility function parameters for investment decision-making process. The proposed method allows quantitative evaluation of two factors: the individual risk aversion and individual disposition toward lost business opportunities. Both factors are the main psychological aspects that can be observed during a decisionmaking process under uncertainty and risk. The effectiveness of an investment project is evaluated by NPV index. This index is considered a random variable that can be estimated by an investor as an interval [NPV1; NPV2 ]. Main difficulties in decision-making process arise when [NPV1; NPV2 ] interval includes a zero value. The mathematical model for decision-making process optimization was developed and proposed in this paper. The model is based on subjective utility function with two parameters: β and γ. Coefficient β is used for quantitative evaluation of fear of financial losses and coefficient γ is used for evaluation of regret of profit loss. The method of quantitative evaluation of β and γ is a test with 10 questions. Peculiarities of test questions are discussed, and calculation process of sought coefficients is presented.

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References

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How to Cite
Данько Е. Evaluation of Subjective Utility Function Parameters // Izvestiya of Altai State University, 1, № 1(93) DOI: 10.14258/izvasu(2017)1-12. URL: https://izvestiya.asu.ru/article/view/%282017%291-12.
Issue
No 1(93) (2017): Известия Алтайского государственного университета
Section
Статьи

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