AN ADDITIVE GROUP UTILITY FOR A FUND MANAGER.

PORTFOLIO management (Investments); INVESTMENT advisors; UTILITY functions; UTILITY theory; GROUP decision making; HARSANYI, J. C.; INVESTMENTS; ETHICS; MARGINAL utility

The additive utility formula developed by Harsanyi specifies how a rational ethical individual acting on behalf of other people ought to behave. Unfortunately the formula is not invariant to arbitrary utility transformations and hence requires interpersonal comparisons of utility. Many economists have also attacked the formula on ethical grounds. This paper transplants the Harsanyi paradigm to a new context: that of fund management. We add three further axioms to the Harsanyi argument and deduce the weighted group utility formula with each individual's weight equal to the inverse of the marginal utility of his investment in the fund. These weights make our formula invariant to arbitrary utility transformations which eliminates the problem of internal comparisons of utility. We also explore a number of other properties of this group utility function. [ABSTRACT FROM AUTHOR]

Copyright of Management Science is the property of INFORMS: Institute for Operations Research and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)