The Analysis Of Utility Theory And The Applications In Insurance

Modern economics in decision-making risks and uncertainties on the issue of traditional theoretical model is Expected Utility Theory.The model by John Von Neumann and Morgenstern, and others, inheritance 18th century mathematician Bernoulli"St.Petersburg paradox"and the answer on strict axiomatic formed. The basic content model is: there are assumptions in economics basis, the uncertainty of the final outcome scenarios level of the effectiveness of the main decision-making through the various possible after the results were weighted valuation, decision makers seek the weighted after the formation of valuation expected utility maximization. Expected Utility Theory is as a standard description of the decision-making under uncertainty of the economics model rule for decades. Expected Utility Theory as a standard theory of individual choice and the core of Game Theory component of the many economic theory it is a key component of.Insurance problems are the case under the conditions of risk and uncertainty in decision-making problems. The risk from the decision-making theory and practice of two aspects of view, a reasonable decision does not depend on external environmental uncertainties grasp, but also on policy makers of the value of their own judgment. Insurance risk actors in decision-making, must not only consider the objective characteristics of the target risk, but also consider some of their own subjective characteristics. Many insurance decision-making is not just a simple processing of the technical risk, but based on the basic principles of economics to consider a variety of subjective factors affecting the decision-making.We often can be seen in the insurance and insurance practice of the textbooks used in "pure premium + additional premium" pricing model. However, from the market point of view, insurance as a commodity, it should prices and other commodities in essence, is the same, that is the price of insurance products on the market by the supply and demand decisions, it and other commodities only difference is that it the price is invisible risks pricing rather than tangible products pricing. So should insurance pricing and other tangible goods, requires the establishment of a price scale. Expected Utility Theory is used to establish such standards and to answer whether this price scale for the insurer or the insured are fair and reasonable.Although the Expected Utility Theory is a cornerstone of very important economic building, but in the last few decades, the theory encountered a lot of problems, it can not explain many phenomena, and its several basic axiom of the experimental data was breached. These problems stimulated the other tried to explain some of the uncertainty or risk individuals under the conditions of the development of the theory. Prospect Theory is one of such.Prospect Theory is behavior psychology and the economics anastomosing first by abroad scholar Kahneman and Tversky clear and definite. They believe that the personal circumstances of the risk demonstrated by the choice of expected utility theory and the basic principle is not consistent. Prospects theoretical model includes three aspects: 1, the value function. One value in the form and function parameter estimation, the value function of psychology explained that the value function of extraction methods, based on the superior value of the random function, risk aversion, loss aversion, are hot on its direction. 2, weighting function. One core issue of the right to re-form and function parameter estimation, weight function of psychology based on the weight function extraction methods. 3, the function and value of the portfolio weighting function rules and impact studies, research in this area has been part of academics attention. These aspects of the research results very rich, making prospects for theoretical description of continuously improve, application scope. But Prospect Theory is not a perfect theory, also have this or that kind of problems. Prospect Theory is descriptive model of the shortcomings, and normative model (with the strict mathematical model derived) compared to its lack of strict theory and mathematical derivation, on people's behavior can only be described, the theoretical study of the prospects only it can be descriptive getting better and better, in other words it was simply a statement of how people will do, but not tell people what to do.In this paper, the author made the following major concrete work: First, Expected Utility Theory and Prospect Theory of doing a comparison of the description, the focus is on these two theoretical points clear framework and create a rough outline of the theory. Second, try to Expected Utility Theory to explain the theory and prospects in the insurance and certification of several specific issues, and try to give their own interpretation. Third, it is trying to use to Expected Utility Theory and Prospect Theory for a review of their existing problems and shortcomings to be explained, and expected utility theory and the theory of their respective prospects for a simple amendment to the description and prospects.The author's research ideas are based on the theoretical description and some application. From this perspective, innovation is possible in this paper: First, theoretical comparison. Both as a link between inheritance and the theoretical breakthrough in the case, found by comparing the respective strengths and weaknesses is a very meaningful thing. On the current situation, the expected utility theory and the theory of separation of the prospects introduced more common, the two together, targeted contrast relatively small. Second, the advantages have shortcomings involved. In reality, they can not there is an all-encompassing theory, each theory has its own unique feature, but as a believer in the theory may only overlook its shortcomings its strengths, which is stressed more than the applicability of the theory, the rigor of to avoid too much involved in its problems. In this paper, the theory of expected utility theory and the prospects for a panoramic view of the scanning, making both more clearly show before you. Third, it is practical application. Expected Utility Theory as the study for a long time, in the insurance of a wide, and the author chose two issues to give their own answers. Prospect theory in the application of insurance is not a lot, because of their theoretical model of expected utility theory not as rigorous, standardized, evidence of existence of great difficulties, but I also have a certain try.In this paper, the basic framework and system are as follows: Chapter I is Expected Utility Theory and its application part. Expected Utility Theory introduces the basic framework of expected utility theory and some application of the insurance answer a few questions. Chapter II is of Prospect Theory and its application. Prospect Theory introduced the main contents and answered by the theory of moral hazard prospects under optimal insurance. The third chapter is briefly reviewed. It target Expected Utility Theory and Prospect Theory for success and lack of a brief review and look ahead to future development. Concluding remarks were carried out on the full text of a summary.