Applications of Utility Functions to Modeling of Expectations Are Non-Robust, Are ‘Out of Whack’

Abstract

This research note provides clear, unambiguous rationalization for the normative that applications of utility functions to modeling of expectations are non-robust, are, in relation to best practice, out of whack. With this inference in tow, all formal theoretical studies that apply utility functions to modeling of any of Game Theoretic Interactions (GTIs), General Equilibriums (GEs) - as distinct from models of General Disequilibrium - or Rational Expectations Equilibriums (REEs), all of which are exercises in modeling of expectations, are non-robust, as such out of whack with best practice. With allusions to successful implementations in context of markets for managed funds, markets for IPOs, modeling of preferences, and labor markets in tow, the note provides an introduction to effectiveness of probability measures as robust alternatives for modeling of expectations.

Keywords: Expected Utility, Functions, Rational Expectations, Certainty, Model, Equilibrium

JEL Classification: C6, C7, D5