Exponential utility

In economics and finance, exponential utility refers to a specific form of the utility function, used in some contexts because of its convenience when risk (sometimes referred to as uncertainty) is present, in which case expected utility is maximized. Formally, exponential utility is given by:

${\displaystyle c}$ is a variable that the economic decision-maker prefers more of, such as consumption, and ${\displaystyle a}$ is a constant that represents the degree of risk preference (${\displaystyle a>0}$ for risk aversion, ${\displaystyle a=0}$ for risk-neutrality, or ${\displaystyle a<0}$ for risk-seeking). In situations where only risk aversion is allowed, the formula is often simplified to ${\displaystyle u(c)=1-e^{-ac}}$.

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