Banking and Finance - Scholarly Publications

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The Role of Utility Theory in Risk Management for Strategic Decisions
(Faculty of Business Administration, University of Lagos, 2014) Abu, I.N; John, E.E
This study investigates the shape of the utility function across the total outcome domain to determine whether its shape differs across decision makers. However, the objective of the study is to examine whether the differences in the global shape of the utility function affect strategic behavior. In an attempt to achieve this objective, the study adopted EXP-IPT method and the two-piece utility function method. Findings from the result reviews that there is heterogeneity in the shape of utility functions of real decision makers and that this heterogeneity affects strategic decisions. Utility is often measured using the certainty equivalence technique in empirical studies that deal with decision making under risk. In prospect theory, the shape of a decisionmakers' utility function is assumed to differ between the domain of gains and the domain of losses. The proposed convex/concave utility function predicts risk-prone behaviour in the domain of losses and risk-averse behavior in the domain of gains.