Alternative utility functions: review,analysis and comparison

The paper reviews the development of von Neumann and Morgenstern (vNM) utility theory. Kahneman and Tversky’s (KT’s) prospect theory is introduced. The vNM utility function is compared and contrasted with KT’s value function. We prove the uniqueness of two popular utility functions. First, we show that all power utility functions possess constant RRA. And, we show that all exponential utility functions have constant ARA. The paper concludes by discussing applications, strengths and weaknesses of various utility functions.