Friedman-Savage utility function
- Friedman-Savage utility function
The Friedman-Savage utility function is the theory that Milton Friedman and Leonard J. Savage put forth in their 1948 paper ["Utility Analysis of Choices Involving Risk" with Leonard Savage, 1948, "Journal of Political Economy" Vol. 56, No. 4 (Aug., 1948), pp. 279-304 [http://links.jstor.org/sici?sici=0022-3808%28194808%2956%3A4%3C279%3ATUAOCI%3E2.0.CO%3B2-% JSTOR] ] , which argued that the curvature of an individual's utility function differs based upon the amount of wealth the individual has. This curving utility function would thereby explain why an individual is risk-loving when he has less wealth (e.g., by playing the lottery) and risk-averse when he is wealthier (e.g., by buying insurance).
External links
* [http://cepa.newschool.edu/het/essays/uncert/aversion.htm Website discussing the theory]
References
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