Utility of Money

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Utility of Money
One thing I noticed in solutions to 6.1: Several students insisted on having learned in the lecture that the utility function of money is logarithmic - as if that were a hard fact.

It’s not. Reread that part of the slides. The point is not that the utility of money is logarithmic. Any utility function is a model - and as such (somewhat) arbitrary and subjective. There is no correct utility function for anything in the real world. There are some that make sense and some that make less sense. And that entirely depends on how you personally value (for example) money.

That was basically the point of Exercise 6.1: What results you get depends on which model you use when you try to describe real world situations formally. So you need to be careful which model you choose, because the results may differ significantly. But don’t confuse that with “this is correct” and “this is wrong”, let alone “the utility function of money is logarithmic”.

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