Utility and Risk Preferences Part 1 - Utility Function

[@pluiedemiel]

thank you so much sir, my textbook was rubbish at explaining this concept, i think they're not very fond of annotating their diagrams in general which gives a nice layout to the book but a very unpleasant learning experience for the student. anyway, will defo check out more of your other videos!

[@mikewdemarco]

Even when I'm not in your class anymore I'm using your lectures for RMI 600, thanks.

[@RonaldMoy]

Good luck with the course.

[@arsalanraza9588]

Beautifully and simplistically explained. Thanks a ton

[@asianflex786]

Thank you sir. Your are very clear and the use of your examples has really helped me grasp this concept

[@offbeatdesi]

Amazing video Ronald!! I am giving CT8 ( Financial Economics ) exams , part of Actuarial Science . This video has cleared my doubt.. :)

[@tommao6471]

Thanks a lot! I really struggled to understand risk theory, now it's much clearer. Great explanation :)

[@arijitgupta3334]

Simple and best explanation ever. Thank you very much

[@hassancohmdan9851]

4:55 not rather but satisfied the same right? Since utility is the same for both.

[@jespermadsen4348]

Very well explained. Thank you, Ronald!

[@everything_is_on_fire3155]

Really helpful video man. It was simple, straight, and alot easier to understand. Thanks alot.

[@luizamorim8265]

This is some quality content, I logged in just to subscribe, thanks very much for your continuos contribution

[@michmichxo22]

Thank you I have a midterm tommorow and it finally makes sense

[@laurencearnfinsen]

Great lecture! Any chance you could elaborate on; "Expected loss"? Thanks again for the lecture!

[@evangelineagustinolaer813]

which one should be an ideal investor among the three different investors considering risk. Thank you for sharing your idea.

[@TS-zq6lf]

Thanks for clearing this topic up it’s been bugging me for ages

[@trivietle97]

you're the GOAT

[@akrammithun78]

Just splendid..well articulated in the most comprehensive manner. i just did not understand an inch in my class.

[@anamchowdhury6837]

mama evabe na blleo parta........however amio may b akta thanks pai ;)

[@huai-jinzhang6099]

nice tutorials, clear and easy to understand. ..love them.

[@nguyenny1854]

thank you sir, due to your explaining, i was Enlightened this theory, thank you so much

[@evangelineolaer8]

Interesting subject. Which one is an ideal investor considering these 3 different investors with risk preferences? Thank you.

[@omarcuppini7072]

Very clear video, thank you

[@HasanIbra]

Explained very simple and clear

[@shanbelwoldie131]

thank u my Dad It is good explanation

[@jacqueshollands5630]

Excellent explanation

[@RdasilvaG22]

thanks for this video...well explained. kind of confused at the beginning :)

[@sarag.regassa7947]

Thank you so much! This was very helpful!

[@tedros6917]

THANK YOU THIS ACTUALLY MAKES SENSE

[@Fsheena]

Thanks! This helped me understand a topic in my micro module :)

[@ottoberger6706]

where are this informations from? Could you link a source please? (paper, textbook...)

[@RonaldMoy]

I believe I got it out of one of the CFA readings.

[@jeromedavidson3615]

Love you sooo much

[@andrewnyumba]

this has been very helpful. thanx

[@serg3y]

Please put zero on the X and Y and move the X ticks to line up with dashed lines. Confusing otherwise.

[@King1CurtisLOLZBros]

Ronald Moy MA MANNNNNNN

[@preeyakotecha]

Hi there, could i ask you for some help on a question 1. (a) Explain why a monotone transformation of an expected utility function may not represent the same preferences over lotteries. [20%] (b) Jane is risk averse with Bernoulli utility function u=(x)^1/2. How does she rank the following two lotteries: L1=(4,9,0.5,0.5) and L2=(1,16,0.5,0.5)? You are told that Jane’s brother Jack is more risk averse than her. How would he rank the lotteries? Jane’s cousin June is risk neutral, how does she rank the two lotteries? Explain why your answer about Jack and Jane’s ranking does not require you to know the specific functional form of the Bernoulli function. [20%] Especially the second part of question b) I'm not too sure on how to answer. Thank you!!

[@emmanuelacheampong2751]

Great video! Keep it up

[@sreeharsha75]

Thanks for the video. Really good

[@remiecastro5198]

Hello, can I ask if the utility function of a risk neutral investor is always linear? And does a risk neutral investor considers the level of satisfaction in making decision or they are just focused on the potential gains /expected returns? Thank you, I hope you can answer me 😊

[@RonaldMoy]

Yes, it's a straight line because they only care about expected value. The level of satisfaction is determined by the expected return so they do care about satisfaction.

[@remiecastro5198]

@@RonaldMoy thank you for responding! I know it now, thanks!

[@drumshhrum]

Hi everyone, why is the gambling line (red line) straight? Thanks a lot!

[@RonaldMoy]

The expected value of the gamble is the red dashed line. Because it is below the curved line (the utility function), the individual gets lower utility from taking the gamble than he gets from the sure thing. For example, if you flip a coin, heads the person gets $100 and tails he gets nothing, if he's risk averse, he'd get greater utility if someone just gave him $50.

[@drumshhrum]

thanks a lot ronald, please also tell if the red line could have also been a curved line below the blue line... wanted to know if it has to be straight. When we plot a chart between Expected Utility and Standard Deviation, its curve comes from E(U) = E (Return) + constant*(std dev)^2.. do we have a similar equation for this? thanks once again

[@RonaldMoy]

kushagra deep The red line will be straight because you're' taking the expected return of two values. From my previous example of flipping a coin E(U) = .5 U(W=0) + .5 U(W=100), which is a linear function. The standard deviation isn't used to construct the red line.

[@drumshhrum]

thanks a lot Ronald... appreciate your help...

[@robertkrol4538]

I'd also like to join Kushagra and thank you for that helpful video, although I'm afraid I still have some troubles trying to understand how the red line should be plotted. In the linear function, are probabilities the coefficients ? If the function E[U(coin flip] =is given by .5 U(W=0) + .5 U(W=100), it looks to me like it should be a constant function.

[@tanyen8177]

Thank you sir! This is very useful to me

[@hanhangao6541]

still dont understand how the red dashed line come into being, why the utility function of gamble is a straightline? thanks

[@RonaldMoy]

The blue line is the utility function so each point on it shows how much utility you have at each level of wealth. The red dashed line is just an average of the $50k and $150k, where the average is determined by the percentage you put in each asset. This turns out to be the equation for a straight line. If you start with 100% at $50k wealth and 0% at $150k wealth the average is $50k. For every 10% you move from $50k wealth to the $150k wealth, your wealth increases by $10k. Since the change is the same for every 10% change, you have a straight line.

[@hanhangao6541]

Thank you so much:) Really love your video!!!They help me a lot!

[@gmmkeshav]

how did you made the graph

[@RonaldMoy]

Just drew it in PowerPoint using the drawing tools.

[@gmmkeshav]

@@RonaldMoy How are you getting the blue line? Which function it is representing(can you provide examples with mathematical equations)? And why utility from 50k to 100k is more than 100k to 150k?

[@RonaldMoy]

@@gmmkeshav There's diminishing marginal utility of wealth so going from 50 to 100 gets you more utility than when you are richer and going from 100 to 150.

[@Olav3D]

Thanks, I get it now :)

[@hounamao7140]

But so, how do you draw the straight line if probabilities are say: 0.2; 08 ?

[@RonaldMoy]

The straight line would still be the same, the expected value would be different. Instead of an average of $100k it would be .2(50)+.8(150)=130k

[@hounamao7140]

​@@RonaldMoymakes sense! thank you))

[@kavyanageshkandala5983]

Thanks alot sir !

[@mrhargeable]

Thank you for this video!

[@armansoltani]

really appreciate it!

[@zacccy89]

thank you so much, very clear!

[@davismotomiya29]

Wealth u(W) = ROOT W, W=10, probability 0.3 to turn to 100, 0.7 to lose everything, wants to avoid risk, how much is he willing to pay? (0,1,2,3)

[@petrhorak931]

Risk lovers = all U.S. action movie heroes. :D

[@LisaHoving]

This helped alot. Thanks!

[@tkdesai13]

Really helpful!!

[@JoshTizza1]

Thanks so much mate!

[@lenanovelli123]

Amazing, thanks!!

[@patricksiaulys9981]

very helpful !!

[@acnotinforever561]

200 likes from me!

[@abdulrazzaq9726]

Upload complete videos lecturers of Economics for postgraduate students.

[@eduardocasanova7301]

Someone knows who developed this theory? of Wealth utility/risk aversion

[@subhamoyroy5029]

somewhere around 5.20 u said the person will have 90k with certainty than do gambling... and a 10k pay to assure himself to get 90k dollars .actually i couldnt get that part can u say it in brief ? Thank u

[@RonaldMoy]

The red dashed line shows the expected value of the gamble (50% chance of $50k and 50% chance of $150k, which is $100k.) If we draw a line to the left from that point (red dashed line above $100k) to the utility curve (blue curve), where it intersects will show us the point where we have the same utility with certainty as we do in receiving $100k. In this case, it occurs where wealth equals $90k. This means we have the same satisfaction (utility) at $90k with certainty as we do with a gamble that has an expected value of $100k. In this case, you might be willing to pay up to $10k to receive $90k with certainty rather than $100k as a gamble.

[@subhamoyroy5029]

thank u so much sir for clearing my query...hope to ask more questions in future.

[@nurulawang3792]

thank you, this helps a lot :)

[@carolinamena1279]

thank you!

[@davidlaport5841]

Hey everyone, Would the risk averse (concave) risk neutral (linear) risk loving (convex) also respectively represent the increasing- constant- and decreasing- relative risk aversion. Can IRRA, CRRA and DRRA be represented in graphs. I can only find the marginal utility curves online but not these.

[@MyMrwrestling]

top man respect u should teach in the uk

[@keli5040]

may i ask a question sir? are you also teach in Khan, i think i recognize your voice and it does real help me a lot!

[@RonaldMoy]

No only here.

[@Xez1919]

You should have named it expected value of utility, not utility of expected value. E[U(x)] is not equal to U[E(x)], unless the decision maker is risk neutral.

[@НатальяОрлова-б9б]

Wrong interpretation of EV and EU on the graph for risk-averse, sir.

[@leonardozuniga4304]

Thanks

[@alissa7282]

1:40

[@jabbour1000]

thnx

[@Mariana-cd8zx]

I love you

[@roshanraut993]

Hii sir I am from India and this topic learn today in my university surat.veer narmad south gujarat university surat ..you visit to my university surat. Please sir..👏

[@ca.savanpatel8604]

You are speaking wrong way. You should speak risk averse investor buy insurance for CU 10000 for getting insured for CU 100000

[@hkh117]

thank you!

[@julietajulia3863]

Thank you!