A bettor with utility function U(x) = ln(x), where x is total wealth, has a choice between the following two alternatives:
A Win $ 10,000 with probability 0.2 Win $1000 with probability 0.8
B Win $3000 with probability 0.9 Lose
$2000 with probability 0.1
a If the bettor currently has $2500, should he choose A or B? b Repeat a, assuming the bettor has $5000. c Repeat a, assuming the bettor has $10,000.
d Do you think that this pattern of choices between A and B is reasonable? Why or why not?
Source: D. E. Bell (1988) "One-Switch Utility Functions and a Measure of Risk." Management Science,
This question was answered on: Dec 18, 2020
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