As far as I can tell, utility functions are not standard in financial planning. I think this is dumb (that is, the neglect is dumb; utility functions are smart). Am I right? Sure, you don't know the correct utility function, but see the case for made-up numbers. My guess is to use log of wealth with extra loss-aversion penalties. Wealth is something between 'net worth' and 'disposable savings'.
I had reason to think about this recently from observing a debate over a certain mean/volatility tradeoff. The participants didn't seem to realize that the right decision depends on the size of the stakes. Now you certainly could realize this intuitively, but an expected-utility calculation would guarantee that you'd pick up on it. Moreover, I tried running the problem with made-up numbers and it became clear that any financially healthy person in that situation should take the riskier higher-mean approach, the opposite conclusion to the consensus.
I think this is dumb (that is, the neglect is dumb; utility functions are smart). Am I right?
Not in the first approximation, because utility is (hopefully) a monotonous function and you would end up in the same spot regardless of whether you're maximizing utility or maximizing wealth.
The participants didn't seem to realize that the right decision depends on the size of the stakes.
Well, the first thing that the decision depends on is the risk aversion and there is no single right one-size-fits-all risk aversion parameter (or a function).
But yes, you ...
If it's worth saying, but not worth its own post (even in Discussion), then it goes here.
Notes for future OT posters:
1. Please add the 'open_thread' tag.
2. Check if there is an active Open Thread before posting a new one. (Immediately before; refresh the list-of-threads page before posting.)
3. Open Threads should be posted in Discussion, and not Main.
4. Open Threads should start on Monday, and end on Sunday.