The Friedman-Savage utility function is the theory that Milton Friedman and Leonard J. Savage put forth in their 1948 paper ^[1], which argued that the curvature of an individual's utility function differs based upon the amount of wealth the individual has. This curving utility function would thereby explain why an individual is risk-loving when he has less wealth (e.g., by playing the lottery) and risk-averse when he is wealthier (e.g., by buying insurance).

Contents 1 Additions 2 See also 3 External links 4 References

[edit] Additions

Four years after the publishing of the original article, Henry Markowitz, a former student of Friedman's, argued in his article ^[2] that some of the implications of the Friedman-Savage utility function were paradoxical. Specifically, its implication that those at the highest level of income would never take risks.^{[clarification needed]} His solution was to relate the curvature of an individual's utility function to increases in wealth. This involved determining an individual's "normal" level of income, controlling for utility gains from "recreational investments" (The psychological utility gained by the act of gambling), and measuring deviations from the initial level of utility at the "normal" level of income.

[edit] See also

• Expected utility hypothesis

[edit] External links

• Website discussing the theory

[edit] References

1. ^ "Utility Analysis of Choices Involving Risk" with Leonard Savage, 1948, Journal of Political Economy Vol. 56, No. 4 (Aug., 1948), pp. 279-304 JSTOR
2. ^ "The Utility of Wealth ", 1952, Journal of Political Economy Vol. 60, No. 2 (Apr., 1952), pp. 151-158 [url=http://cowles.econ.yale.edu/P/cp/p00b/p0057.pdf]

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