Exponential Utility

Exponential utility is a mathematical function used in economics and finance to model an individual’s risk preferences, particularly risk aversion. The function expresses how much satisfaction or utility an individual derives from wealth, considering that as wealth increases, the additional satisfaction gained diminishes. Exponential utility is particularly useful in decision-making under uncertainty, as it reflects the diminishing marginal utility of wealth and the tendency to avoid risk when potential losses grow larger.

Example

An investor with exponential utility would prefer a certain payoff over a risky investment with the same expected value, illustrating risk aversion.