Simulation of Investment Behaviors Using Risk-Influenced Utility Models of Health and Wealth

Recently, people have been paying much attention to health and financial investments, aiming for a better quality of life and financial security. This study introduces utility functions that operate as two-variable adaptations of several widely recognized one-variable utility functions, typically used by risk-averse investors. We demonstrate through analytical methods that these utility functions depict the substitutionary preference between two investment options. We aim to apply a bi-variate utility function within the utility maximization framework that incorporates two risks. There is a lack of longitudinal data on the returns of health investments. Most studies categorize people’s level of health broadly and only report the yearly percentages of the population in each category without detailing the effects of individual health investments. In the present paper, we show a model that defines the return on an individual health investment for this kind of health-level data. We also develop a methodology to simulate people’s investment choices based on their preference for maximum utility. The results help us understand better the costs involved, the extent of investment coverage, and the relationship between two investment choices. Ultimately, it offers a detailed view of the observed population’s investment behavior, providing valuable insights for future studies and strategies.