Utility Theory and Its Application on Investment Decisions in Kenya

Authors

  • Ahmed Mohamed Omar Department of Accounting and Finance, Technical University of Mombasa Author

DOI:

https://doi.org/10.59413/eafj/v2.i1.7

Keywords:

Utility Theory, Investment Decisions, Expected utility, Prospect theory

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.

References

Bihari, A., Dash, M., Kar, S. K., Muduli, K., Kumar, A., & Luthra, S. (2022). Exploring behavioural bias affecting investment decision-making: A network cluster based conceptual analysis for future research. International Journal of Industrial Engineering and Operations Management, 4(1/2), 19–43. https://doi.org/10.1108/IJIEOM-08-2022-0033 DOI: https://doi.org/10.1108/IJIEOM-08-2022-0033

Holden, S. T., & Tilahun, M. (2022). Endowment effects in the risky investment game?. Theory and Decision, 92(1), 259-274. https://doi.org/10.1007/s11238-021-09821-4 DOI: https://doi.org/10.1007/s11238-021-09821-4

Jia, Y., Su, L., He, Y., He, L., & Song, A. (2023). An efficient numerical method for the robust optimal investment problem with general utility functions. Journal of Industrial and Management Optimization, 19(8), 6200–6217. https://doi.org/10.3934/jimo.2022212 DOI: https://doi.org/10.3934/jimo.2022212

Kasidi, K., Riwegho, S. A., Omar, A. M., & Kamau, C. G. (2023). Dividend Decisions and Economic Value-Added of Firms in Kenya. East African Finance Journal, 1(1), 7-16. http://dx.doi.org/10.59413/eajf/v1.i1.2 DOI: https://doi.org/10.31235/osf.io/9h4a3

Kumar, S., & Goyal, N. (2016). Evidence on rationality and behavioural biases in investment decision making. Qualitative Research in Financial Markets, 8(4), 270–287. https://doi.org/10.1108/QRFM-05-2016-0016 DOI: https://doi.org/10.1108/QRFM-05-2016-0016

Madaan, G., & Singh, S. (2019, June). An Analysis of Behavioral Biases in Investment Decision-Making. International Journal of Financial Research, 10(4), 55-67. https://doi.org/10.5430/ijfr.v10n4p55 DOI: https://doi.org/10.5430/ijfr.v10n4p55

Mukhongo, E., Njeri, P., & Kamau, C. G. (2022). Relationship between Dividend Policy, Investment Decision, Financial Performance and Survival of the Firms in Kenya. SSRN. https://dx.doi.org/10.2139/ssrn.4283042 DOI: https://doi.org/10.2139/ssrn.4283042

Shiva, A., Arora, N., & Rishi, B. (2022). Do celebrity endorsements influence stock investment intentions?. Marketing Intelligence & Planning, 40(6), 804-819. https://doi.org/10.1108/MIP-01-2022-0040 DOI: https://doi.org/10.1108/MIP-01-2022-0040

Downloads

Published

2023-12-15

How to Cite

Omar, A. M. (2023). Utility Theory and Its Application on Investment Decisions in Kenya. East African Finance Journal, 2(1), 48-55. https://doi.org/10.59413/eafj/v2.i1.7

Article PlumX Metrics

PlumX Metrics