Utility Theory and Its Application on Investment Decisions in Kenya

Abstract

This article undertakes an examination of the influence of utility theory on investment decisions. Utility theory, which is rooted in economics and decision theory, offers a framework that transcends conventional monetary returns by taking into account subjective happiness and value. The article explores the theoretical foundations of usefulness methodology and its practical implications in investment decision-making. Utility theory empowers investors to make decisions that are commensurate with their risk preferences and overall well-being by including utility considerations alongside anticipated returns. It facilitates the quantification and comparison of utility across investment alternatives and acknowledges the varied risk preferences of individuals. Utility functions mathematically articulate preferences and facilitate decision-making by assigning utility values to outcomes. Nonetheless, while utility theory proffers valuable insights, its implementation must consider additional factors such as personal circumstances, financial aspirations, time horizons, and market conditions. The article discusses the amalgamation of utility theory with behavioral finance, as well as the criticisms and constraints of utility theory. In summary, utility theory has had a noteworthy impact on investment decisions, enabling investors to make informed and personalized choices that optimize their well-being and satisfaction.

Behavioral Finance in Investment: A Systematic Review

“…(Bell, 1982) Therefore, it is assumed that any reasonable individual would want to abide by the axioms of the theory and that most people actually do so most of the time. Kahneman, 1979 ; (Omar, 2023) (Attimani, 2021) The expected utility theory, or behavioural theory, helps people act rationally. A rational investor will seek to make a profit and avoid risk while still making rational investment-Informed decisions (Omar, 2023).…”

“…Kahneman, 1979 ; (Omar, 2023) (Attimani, 2021) The expected utility theory, or behavioural theory, helps people act rationally. A rational investor will seek to make a profit and avoid risk while still making rational investment-Informed decisions (Omar, 2023). However, in reality, individuals often act irrationally and make mistakes regarding future predictions.…”