Gaussian Approximation of Expected Utility

Author

Harvey Diamond
Gregory M. Gelles, Missouri University of Science and TechnologyFollow

Abstract

We apply Gaussian methods to the approximation of expected utility. An explicit formula, in terms of mean, variance and skewness, is developed for the two-point Gaussian method. We derive the following characterization: the Gaussian method on n points approximates E[U(X)] by simulating X with the unique discrete random variable on n (or fewer) points which matches the first 2n moments, E[X⁰],...,E[X^2n-1], of X.

Recommended Citation

Diamond, H., & Gelles, G. M. (1999). Gaussian Approximation of Expected Utility. Economics Letters, 64(3), pp. 301-307. Elsevier.

Department(s)

Economics

Keywords and Phrases

D81; Expected utility; Expected utility approximation; Gaussian integration; Mean-variance approximation; Taylor series approximation

International Standard Serial Number (ISSN)

0165-1765

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 1999 Elsevier, All rights reserved.

Publication Date

01 Sep 1999