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臺大管理論叢
第
27
卷第
2
期
195
where
U
j
is the utility of alternative
j
,
w
i
is the weight of criteria
i
, and
u
ij
is the
measurement of alternative
j
in criterion
i
. Equation (2) is the standard formula for
computing the utility of an alternative (Keeney and Raiffa, 1993). After calculating the utility
of each alternative, the decision-maker decides which one is the best.
3.3 Utility Theory and Risk-Taking Behavior
The utility theory was developed according to the preference of the decision-maker
under risk. Utility describes the attitude of the decision-maker towards risk by translating its
satisfaction into a utility value (Keeney and Raiffa, 1993). Utility is very subjective since it
varies with the attitude on accepting risks. Everyone has different risk-taking behaviors, so
individuals exhibit various utilities regarding risk (Taha, 2007). Classically, the following
three types of risk-taking behavior are considered in the literature.
Risk Averse
Risk-averse decision-makers are those decision-makers who have higher sensitivity to
loss than to profit (Taha, 2007). They prefer the utility where the rate of return exceeds the
risk-free rate. If no option exists, then risk-averse decision-makers will choose risk-free
options. The shape of the utility function of a risk-averse decision-maker is concave.
Risk Neutral
Risk-neutral decision-makers ignore risk when making decisions, suggesting that yield
is equal to the change in utility. They will choose alternatives that provide a maximum return
without considering the risk involved. The utility function for a risk-neutral decision-maker
is linear (Taha, 2007).
Risk Seeking
Risk-seeking decision-makers have a higher sensitivity to profit than to loss. Risk-
seeking decision-makers are more likely to invest in those options involving a higher risk.
The shape of the utility function is convex (Taha, 2007).
3.4 Utility Function
There are many functions used in determining the utility. In one-dimensional utility, if
an attribute represents benefit, the utility function may be specified as follows (Keeney and
Raiffa, 1993):
(3)