Abstract
Expected utility theory, Pratt and Arrow’s risk premium, and the Markowitz risk premium are based upon Von Neumann and Morgenstern’s five axioms of cardinal utility. The derivation of these measures from these axioms is generally considered too mathematically sophisticated for the undergraduate curriculum. This leaves a wide gap in the foundation of financial theory for the undergraduate. An alternative simplified presentation of expected utility that is suitable for the undergraduate curriculum, and that avoids the nuances and complexities of the traditional mathematically more complete derivation, is presented here. In addition, an easily derived in-the-large risk premium is shown to be the product of a simple geometric measure of concavity and the standard deviation of the gamble. An application to futures markets is presented as an illustration.
Recommended Citation
(2026)
"Parsimonious Expected Utility and In-the-Large Risk Premiums for the Undergraduate Curriculum,"
Journal of Economics and Finance Education: Vol. 8:
Iss.
2, Article 3.
Available at:
https://scholarship.rollins.edu/jefe/vol8/iss2/3
