Quadratic utility functions require fixes when the probability of decreasing utility is large
the verdict
SUPPORTED
the evidence backs this
confidence 75/100
Quadratic utility functions possess a maximum (bliss point) beyond which further increases lead to decreasing utility, creating severe limitations that require modifications or truncation when higher returns risk moving past this threshold.
Evidence for · 3
doi.org: A Note on the Implications of Quadratic Utility for Portfolio Theory
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Notes quadratic utility implies a maximum beyond which marginal utility declines, requiring restricted returns.
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More for · 2
sciencedirect.com: On the computation of optimal monotone mean–variance portfolios via truncated quadratic utility ☆
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Discusses computing portfolios via truncated quadratic utility to address its standard limitations.
link.springer.com: Portfolio decision with a quadratic utility and inflation risk
cited by 0
Notes quadratic utility is symmetric to a bliss point where further consumption lowers utility.