Part 2. MM4XL Tools > 1. Strategic Tools > Decision Tree > 4. Anatomy of a Decision Tree Output Report > Technicalities > Utility Functions > Logarithmic Utility Function

Decision Tree

Logarithmic Utility Function

Investors with large amounts of funds available may find risk more attractive (decreasing risk aversion) than other less wealthy individuals. Such situations are typically handled with a logarithmic utility function of the form:

Decision Tree Software for Business and Management Model Making

Decision Tree Software for Business and Management Model Making

When the EMV is maximized, DTree adds R to the expression in order to not take the logarithm of a negative number, which would return an error. Should you get a negative value, use a large enough R value so that x+R is not less than zero. The picture above compares logarithmic utility functions. Changing the value of R simply shifts the curve up the Utility axis.

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