An Analysis of Heterogeneous Utility Benchmarks in a Zero Return Environment

Posted: 9 Aug 2011 Last revised: 4 Jun 2013

See all articles by Fred Viole

Fred Viole

OVVO Financial Systems; Fordham University

David N. Nawrocki

Villanova University - Department of Finance

Date Written: August 9, 2011

Abstract

The utility of an investor should be based on an acceptable loss in the loss region and a target return in the gain region of a set of investment opportunities. The level of these benchmarks will unveil an opportunity cost, break-even effect or indifference when the return of an investment equals zero. This condition has been arbitrarily assumed away for continuity and other simplification purposes. Historical utility functions, those both von Neumann-Morgenstern compliant and not, are all constrained via a single target or reference point. This single target restriction coupled with the arbitrary zero return assumption has ignored the important interpretation of this salient point on the utility curve as a proxy for the investor’s current wealth.

Keywords: Utility, Loss Aversion, Gain Seeking, Break-Even Effect, Opportunity Cost, Discontinuity

JEL Classification: D1

Suggested Citation

Viole, Fred and Nawrocki, David N., An Analysis of Heterogeneous Utility Benchmarks in a Zero Return Environment (August 9, 2011). International Review of Financial Analysis, Vol. 28, No. June, 2013, Available at SSRN: https://ssrn.com/abstract=1907209

Fred Viole (Contact Author)

OVVO Financial Systems ( email )

NJ
United States

Fordham University ( email )

Bronx, NY 10458
United States

David N. Nawrocki

Villanova University - Department of Finance ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
610-519-4323 (Phone)
610-519-6881 (Fax)

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