the notes and text books mention alpha in the notes and W as level of wealth in the utility function u(W) = quadratic/exponential/etc. Alpha is not defined. Is there somewhere it explains what alpha is? I.e. U(w) = alpha*E(W) -0.5*E(W^(2)) What is alpha?
Hi, alpha is a parameter that determines the shape of the utility curve. You can set it to whatever you like to reflect risk preference. Broadly alpha >0 for risk aversion, alpha = 0 for risk-neutrality, alpha < 0 for risk-seeking.
