Choice under uncertainty - EU Seguros

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Aaah. Dealing with uncertainty. Risk-management. That complicated jargon that only actuaries deal with. Here let’s keep it simple.

Question:  A risk-averse individual is offered a choice between a gamble that pays $1,000 with a probability of 1/4 and $100 with a probability of 3/4, or a payment of $325. Which would he choose? What if the payment were $320?

My Answer:


Suppose u(W) = 1/W. What is the risk attitude of this person? 

Calculate the Arrow-Pratt measure of risk aversion for this preference.

To be continued…

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