Abstract
The curvature of a decision maker's utility function is often used to measure his risk preference. In order to comprehensively describe an individual's decision making behaviour, however, it would also seem desirable to measure the gain in utility from an increase in wealth or income before accounting for risk. If a small increase in wealth leads to a large utility gain, then it could be said that the individual's aspiration to achieve the wealth increase would be high. This aspiration, however, may be more than offset by the risk involved in obtaining this extra wealth and the individual's attitude towards risk. In the following paper it is shown how the marginal utility of Marshall can be used in a measure of aspiration with this measure then combined with the usual measure of risk preference to explain the shape of any individuals utility curve. Using these measures, a general utility curve for all income or wealth classes is postulated.
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Bibliography
J. von Neumann and O. Morgenstern, Theory of Games and Economic Behavior, Princeton 1944.
A. Marshall, Principles of Economics, 8th edition, London 1920.
R. Schlaifer, Probability and Statistics for Business Decisions, New York 1959.
M. J. Friedmann and L. J. Savage, ‘The Utility Analysis of Choices Involving Risk’, J.P.E. (1948) 279–304.
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The author would like to thank Professor I. Horowitz for providing the inspiration that led to his note. Any errors are the responsibility of the author.
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Hughes, W.R. A note on Marshallian and von Neumann-Morgenstern utility. Theor Decis 3, 371–376 (1973). https://doi.org/10.1007/BF00138194
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DOI: https://doi.org/10.1007/BF00138194