Decision Under Uncertainty Math Example 3

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Example 3

easy
You can either (A) study for certain +10 points on the final, or (B) not study: 50% chance +20 points, 50% chance +0 points. Calculate EV for both and decide.

Solution

  1. 1
    EV(A) = +10 points (certain)
  2. 2
    EV(B) = 0.5(20)+0.5(0)=+100.5(20) + 0.5(0) = +10 points
  3. 3
    Both have the same expected value; risk-neutral person is indifferent
  4. 4
    Risk-averse student prefers A (guaranteed +10 over gamble)

Answer

EV(A) = EV(B) = 10 points. Risk-averse students prefer A; risk-neutral students are indifferent.
When expected values are equal, risk preference determines the choice. Risk-averse individuals prefer the certain outcome; risk-seeking individuals might prefer B for the chance of a higher outcome. Equal EV is a threshold case.

About Decision Under Uncertainty

Decision under uncertainty involves choosing between options whose outcomes are not known for certain, typically by comparing expected values or risk profiles.

Learn more about Decision Under Uncertainty →

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