Maximizing expected log(wealth) is very different than maximizing expected wealth. A log utility function us much more risk averse.

The Wikipedia article on VNM Utility Theory explains the relationship between the utility function and risk aversion (in the Consequences section).

Maximizing expected log(wealth) is very different than maximizing expected wealth.

Yes, you are right. However even a log utility function does not let you escape a Pascal mugging (you just need bigger numbers).

A log utility function us much more risk averse.

Risk aversion (in reality) does not boil down to a concave utility function. So the OP's claim that a well-defined utility function will fully determine the optimal risk-reward tradeoff is still false.

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

by MrMind 1 min read18th Apr 2016176 comments

2


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