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Bankruptcy And Expected Utility Maximizatiion

Dutta, Prajit Kumar

This paper introduces a utility formulation to the well-known gambler's ruin problem. An agent who maximizes lifetime expected utility has to tradeoff short-term utility against longer-term survival prospects. The optimal tradeoff is established by way of characterizing the agents' value and optimal policy functions. Further, the scope of expected utility maximization is examined by contrasting the bankruptcy probabilities of an agent employing such a criterion with those of an agent who is more directly interested in survival. Economic applications of the theory are also discussed.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 663
Published Here
February 17, 2011

Notes

December 1992.

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