Utility function estimation: the entropy approach

Details Utility function estimation: the entropy approach Utility function estimation: the entropy approach

2007-09-05

arxiv.org/abs/0709.0591v1

Economy

Quantitative Finance

Statistical Finance

9 pages, paper presented at APFA 6 conference

Scientific paper

10.1016/j.physa.2008.02.072

The maximum entropy principle can be used to assign utility values when only partial information is available about the decision maker's preferences. In order to obtain such utility values it is necessary to establish an analogy between probability and utility through the notion of a utility density function. According to some authors [Soofi (1990), Abbas (2006a) (2006b), Sandow et al. (2006), Friedman and Sandow (2006), Darooneh (2006)] the maximum entropy utility solution embeds a large family of utility functions. In this paper we explore the maximum entropy principle to estimate the utility function of a risk averse decision maker.

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