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

By Sukanto Bhattacharya

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Book Id: WPLBN0002097084
Format Type: pdf
File Size: 425 KB
Reproduction Date: 9/1/2011
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Title: Utility, Rationality and Beyond – from Behavioral Finance to Informational Finance  
Author: Sukanto Bhattacharya
Language: English
Subject: Non Fiction, Mathematics, Finances
Collections: Mathematics, Finance Management, Most Popular Books in Bratislava, Finance, Authors Community, Special Collection Mathematics, Economy, Math, Most Popular Books in China, Literature, Science
Publication Date:
Publisher: Hexis, Phoenix
Member Page: Florentin Smarandache


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Bhattacharya, S. (2005). Utility, Rationality and Beyond – from Behavioral Finance to Informational Finance. Retrieved from

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.


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