Utility, Rationality and Beyond – from Behavioral Finance to Informational Finance

By Sukanto Bhattacharya

Book Id: WPLBN0002097084
Format Type: PDF eBook:
File Size: 0.4 MB
Reproduction Date: 9/1/2011

Title:	Utility, Rationality and Beyond – from Behavioral Finance to Informational Finance
Author:	Sukanto Bhattacharya
Volume:
Language:	English
Subject:	Non Fiction, Mathematics, Finances
Collections:	Authors Community, Mathematics
Historic Publication Date:	2005
Publisher:	Hexis, Phoenix

Member Page:	Florentin Smarandache
Citation APA MLA Chicago Bhattacharya, B. S. (2005). Utility, Rationality and Beyond – from Behavioral Finance to Informational Finance. Retrieved from http://www.gutenberg.cc/

Description
This work covers a substantial mosaic of related concepts in utility theory as applied to financial decision-making. It reviews some of the classical notions of Benthamite utility and the normative utility paradigm offered by the von Neumann-Morgenstern expected utility theory; exploring its major pitfalls before moving into what is postulated as an entropic notion of utility. Extrinsic utility is proposed as a cardinally measurable quantity; measurable in terms of the expected information content of a set of alternative choices. The entropic notion of utility is subsequently used to model the financial behavior of individual investors based on their governing risk-return preferences involving financial structured products manufactured out of complex, multi-asset options. Evolutionary superiority of the Black-Scholes function in dynamic hedging scenarios is computationally demonstrated using a haploid genetic algorithm model programmed in Borland C. The work explores, both theoretically and computationally, the psycho-cognitive factors governing the financial behavior of individual investors both in the presence as well as absence of downside risk and postulates the concepts of resolvable and irresolvable risk. A formal theorem of consistent preference is proposed and proved. The work also analyzes the utility of an endogenous capital guarantee built within a financial structured product. The aspect of investor empowerment is discussed in terms of how financial behavior of an investor may be transformed if he or she is allowed a choice of one or more assets that may gain entry into the financial structured product. Finally there is a concluding section wherein the different facets are placed in their proper perspective and a number of interesting future research directions are also proposed.