Application of the expected utility theory for analyzing real estate investment risk

Risk analysis is always a part of decision context in real estate. Generally, the more profit that real estate investment makes, the more risks the investors will take. This paper, using the expected utility, establishes the risk evaluating model, and analyzes the relationship between the profit and the risk of real estate investment. The investors can make strategic decisions according to their different risk preferences. The paper is organized as follow: in section 2, we depict the risk preference; in section 3, we describe a mathematical model of the expected utility; in section 4, an example illustrates the use of methodology; in section 5, we summarize the results. This model can help decision maker not only to achieve their management objectives but also to take the minimum risk, which accords with the objective fact and the psychology of the investors and makes the decision more scientific.