Bridge over ocean
1 May 1992 Financial Analysts Journal Volume 48, Issue 3

What Practitioners Need to Know…About Utility

  1. Mark P. Kritzman, CFA

An important axiom of modern financial theory is that rational investors seek to maximize expected utility. Many financial analysts, however, find the concept of utility somewhat nebulous. This column discusses the origin of utility theory as well as its application within the context of financial analysis.

In his classic paper, "Exposition of a New Theory on the Measurement of Risk," first published in 1738, Daniel Bernoulli proposed the following: "the determination of the value of an item must not be based on its price, but rather on the utility it yields. The price of the item is dependent only on the thing itself and is equal for everyone; the utility, however, is dependent on the particular circumstances of the person making the estimate. Thus there is no doubt that a gain of one thousand ducats is more significant to a pauper than to a rich man though both gain the same amount."

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.