Risk-adjusted utility — risk_adjusted_utility • personnelSelectionUtility

Computes a mean-variance risk-adjusted utility score. With risk_aversion = 0, the score equals expected utility. Larger values penalize uncertainty more strongly.

Usage

risk_adjusted_utility(expected_utility, utility_sd, risk_aversion = 0)

Arguments

expected_utility: Expected utility or mean posterior/simulation utility.
utility_sd: Standard deviation of utility.
risk_aversion: Non-negative risk-aversion parameter.

Value

Risk-adjusted utility score.

References

Bhattacharya, M., & Wright, P. M. (2005). Managing human assets in an uncertain world: Applying real options theory to HRM. International Journal of Human Resource Management, 16, 929-948.

Cronshaw, S. F., Alexander, R. A., Wiesner, W. H., & Barrick, M. R. (1987). Incorporating risk into selection utility. Organizational Behavior and Human Decision Processes, 40, 270-286.

Examples

# Literature: Cronshaw et al. (1987); Bhattacharya and Wright (2005).
risk_adjusted_utility(expected_utility = 100000, utility_sd = 25000,
                      risk_aversion = 1e-6)
#> [1] 99687.5