Question

13.10 Two risky gambles were proposed at the beginning of the chapter: Game 1: Win $30 with probability 0.5 Lose $1 with probability 0.5 Game 2: Win $2000 with probability 0.5 Lost $19000 with probability 0.5 Many of us would probably pay to play Game 1 but would have to be paid to participate in Game 2. Is this true for you

Answer 1

Answer:

yes, it is true

Explanation:

the expected value of game 1 = ($30 x 0.5) + (-$1 x 0.5) = $15 - $0.50 = $14.50

• since the expected value of game 1 is very high compared to the risk of losing, then most of us would probably want to play that game.

the expected value of game 2 = ($2,000 x 0.5) + (-$19,000 x 0.5) = $1,000 - $9,500 = -$8,500

• on the contrary, since the expected value of game 2 is negative and the risk of losing a large amount is very high, very few people will be willing to play game 2 without being paid to do so.