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utility theory

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A class of theory concerned with the behaviours, strategies, and mental processes adopted by individuals faced with making a risky choice or decision. Utility is usually taken as the subjective value to the individual of a particular outcome or attribute. The main applications of utility theory in business and finance are in relation to consumer and investment choices. Different structures of utility and risk preference are considered in portfolio theory. See also behavioural finance; conjoint analysis; prospect theory; time inconsistency.

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