Gaussian Approximation of Expected Utility
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[X2n-1], of X.
Diamond, H., & Gelles, G. M. (1999). Gaussian Approximation of Expected Utility. Economics Letters, 64(3), pp. 301-307. Elsevier.
Keywords and Phrases
D81; Expected utility; Expected utility approximation; Gaussian integration; Mean-variance approximation; Taylor series approximation
International Standard Serial Number (ISSN)
Article - Journal
© 1999 Elsevier, All rights reserved.
01 Sep 1999