A Comment on ‘A Psychologically Plausible Goal-Based Utility Function’

Abstract

Gill advocated using goal-based utility functions versus the standardcommodity-based neoclassical utility function. He argued that a goal-basedutility function would resolve many observed inconsistencies betweenwhat economics predicts and the behavior observed in psychologicalexperiments. To support Gill�s argument, this paper focuses on thestandard extension of neoclassical utility to gambles. Given thisextension, it is straightforward to rewrite the neoclassical utilityfunction as a goal-based utility function. This goal-based utilityfunction will correspond to quantities like the Sharpe ratio andeffect size already widely used in finance and medicine. As we show,minor adjustments of this formula are mathematically identical toproposed psychological plausible models of human behavior. Finallywe show how this formulation can be extended to the case of a goalwith multiple sub-goals.