The typical Von Neumann-Morgenstern utility is convex.

Question

Quizplus · Accepted Answer

Copeland and Weston (1988)describe five assumptions that underlie expected utility and give rise to Von Neuman-Morgenstern utility functions.First,the investor is assumed to be able to rank all possible alternatives.Second,if asset A is preferred to asset B,and asset B is preferred to asset C,then asset A is also preferred to asset C.This principle is generally called transitivity.Third,the ranking is assumed to be strongly independent,which suggests a chosen ranking will hold no matter what other assets are held.Fourth,the ranking is measurable.It is important to be able to assign a number to a portfolio to allow comparison of that portfolio with other portfolios by comparison of the numbers allocated to the portfolios.Finally,it is possible to rank assets and uncertain gambles.

The Typical Von Neumann-Morgenstern Utility Is Convex