Comparing financial investments by their state dependent returns: A one-way log utility representation

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in FachzeitschriftBegutachtung


In a standard single-period model under risk, we formalize and discuss an intuitive criterion for the binary comparison of financial investments. Two investments - x and y - are compared by calculating the present value of x's payoffs using the state dependent returns of y as discount factors. The induced preference is asymmetric but exhibits intransitive indifference. If the feasible set is convex, then the criterion selects a unique maximum element. Interestingly, it can be shown that the induced preference can be represented by a one-way expected utility representation employing logarithmic utility. Besides giving a relevant and illustrative example for a one-way utility representation, this result provides a new interpretation of using logarithmic utility for expected utility based decision-making.
Seiten (von - bis)323 - 328
FachzeitschriftEuropean Journal of Operational Research (EJOR)
PublikationsstatusVeröffentlicht - 1 Apr. 2009