Utility Theory - Deepstash
Utility Theory

Utility Theory

The degree of "utility" as perceived by people decreases gradually. $1,000 is perceived wildly different for somebody with a net worth of $10,000 vs. $1,000,000. Similarly, an increase from $1,000 to $2,000 is perceived as much better than one from $10,000 to $11,000 despite the equal increase.

This is the utility theory developed by the mathematician Daniel Bernoulli.

This theory is not ideal and cannot model every case. It fails in certain cases, which is why prospect theory was developed.

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The idea is part of this collection:

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