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

Decision Tree

Expected Utilities

Expected utilities are a transformation of monetary values into utility values, according to the decision-maker or company risk tolerance. EU embeds the concept that the utility of money grows at a slower rate than the value of money, for instance, the utility of $10 for a homeless person and for a millionaire.

There are situations when investors do not behave in accordance with EMV maximization. This shift in behavior, although not completely explored yet, has been found by many researchers. In certain situations investors are expected utility maximizers. For example, how many of us do not buy collision insurance for a new car? We know the total premium may be much higher than the cost of damage, and nevertheless we buy. This is not a behavior that maximizes EMV, yet it is fully reasonable. DTree allows us to take such aspects into account.

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