Why would maximizing expectation on a concave utility function lead to losing your shirt?

Because you're ignoring risk.

The expectation is a central measure of a distribution. If that's the only thing you look at, you have no idea about the width of your distribution. How long and thick is that left tail which is curling around preparing to bite you in the ass? Um, you don't know.

Is that a critique of expected utility maximization in general, or are you saying that concave functions of wealth aren't risk-averse enough?

Open thread, Apr. 18 - Apr. 24, 2016

by MrMind 1 min read18th Apr 2016176 comments


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