Relative and Discrete Utility Maximising Entropy

The notion of utility maximising entropy (u-entropy) of a probability density, which was introduced and studied in [SZ04], is extended in two directions. First, the relative u-entropy of two probability measures in arbitrary probability spaces is defined. Then, specialising to discrete probability spaces, we also introduce the absolute u-entropy of a probability measure. Both notions are based on the idea, borrowed from mathematical finance, of maximising the expected utility of the terminal wealth of an investor. Moreover, u-entropy is also relevant in thermodynamics, as it can replace the standard Boltzmann-Shannon entropy in the Second Law. If the utility function is logarithmic or isoelastic (a power function), then the well-known notions of the Boltzmann-Shannon and Rényi relative entropy are recovered. We establish the principal properties of relative and discrete u-entropy and discuss the links with several related approaches in the literature.