Utility Transversality: A Value-Based Approach

Publication Type: 
Authors: 
J.E. Matheson
A.E. Abbas
Description/Abstract: 
We examine multiattribute decision problems where a value function is specified over the attributes of a decision problem, as is typically done in the deterministic phase of a decision analysis. When uncertainty is present, a utility function is assigned over the value function to represent the decision maker's risk attitude towards value, which we refer to as a value-based approach. A fundamental result of using the value-based approach is a closed form expression that relates the risk aversion functions of the individual attributes to the trade-off functions between them. We call this relation utility transversality. The utility transversality relation asserts that once the value function is specified there is only one dimension of risk attitude in multiattribute decision problems. The construction of multiattribute utility functions using the value-based approach provides the flexibility to model more general functional forms that do not require assumptions of utility independence. For example, we derive a new family of multiattribute utility functions that describes richer preference structures than the usual multilinear family. We also show that many classical results of utility theory, such as risk sharing and the notion of a corporate risk tolerance, can be derived simply from the utility transversality relations by appropriate choice of the value function.