risk

gbm

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• Jul 12, 2003

• #1

If someone offered you $25 in hand or

a 25% chance at $100 --- which would you pick?

What should you pick and why.

 

Revere14

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• Jul 13, 2003

• #2

$25 in hand.

If it was $24 in hand or a 25% chance at $100, I'd take the 25% chance.

If you can lower your risk without lowering your EV (expected value), take the money and run.

Revere14

 

Gridster

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• Jul 13, 2003

• #3

Absolutely. Take the $25, then you can pick your own game to play.

 

gbm

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• Jul 17, 2003

• #4

Math sez

square root of 25 (5 X 4 = 20)
equals
square root of 400 = 20

then 25 in hand is equal to a 25% shot at 400

 

Revere14

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• Jul 17, 2003

• #5

Huh???

25% shot at $400 has an expectation of $100.

Revere14

 

gbm

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• Jul 17, 2003

• #6

sorry I lost the url but I printed the article and will retype it if you want. about 100 words long

 

drunkguy

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• Jul 17, 2003

• #7

please do. This makes no sense to me whatsoever.

 

gbm

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• Jul 18, 2003

• #8

Let x be a payoff amount in dollars. Let U(x) be a continuous,increasing function of x.

The function U(x) gives an individual's level of satisfaction in fictional "utils" from receiving payoff amount x, and is known as a utility function.

If a certain payoff of $25 is preferred to the gamble,(due to risk aversion) then we want a utility function that satisfies:

U($25)> .25 U($100) + .75 U9($0)

The left hand side is the utility of the certain payoff and the right hand side is the expected utility from the gamble.

Any concave function U(x) will work. for example U(x)= SR (x)
(my SR =square root)

SR(25)>.25 SR(100) +.75 SR(0)

5>2.5

End of copy

I figured(probably wrong) that for the left side to equal the right it would be 400.