Utility Functions: Bernoulli and Exponential Explained

Overview

A utility function captures how much an outcome is actually worth to a decision maker, which is why rational people turn down bets with a higher expected value. This documentation page explains the Bernoulli (logarithmic) and exponential (constant absolute risk aversion) utility functions, risk aversion and the concave curve, and how to compute a certainty equivalent and risk premium, with a verified worked example, then shows how Rational Will does it automatically.

This is a draft. The full body (with the worked certainty-equivalent example, R = 1000: EV $500, EU 0.3161, CE $379.89, risk premium $120.11) is generated and ready to expand here; the paired video plan is attached.