Utility of Choice: An Information Theoretic Approach to Investment Decision-making

Abstract

In this paper we have devised an alternative methodological approach for quantifying utility in terms of expected information content of the decision-maker's choice set. We have proposed an extension to the concept of utility by incorporating extrinsic utility; which we have defined as the utility derived from the element of choice afforded to the decision-maker by the availability of an object within his or her object set. We have subsequently applied this extended utility concept to the case of investor utility derived from a structured, financial product - an custom-made investment portfolio incorporating an endogenous capital-guarantee through inclusion of cash as a risk-free asset, based on the Black-Scholes derivative-pricing formulation.