You must make one of two decisions, each with possible gains and possible losses. One of these decisions is much riskier than the other, having much larger possible gains but also much larger possible losses, and it has a larger EMV than the safer decision. Because you are risk averse and the monetary values are large relative to your wealth, you base your decision on expected utility, and it indicates that you should make the safer decision. It also indicates that the certainty equivalent for the risky decision is $210,000, whereas its EMV is $540,000. What do these two numbers mean? What do you know about the certainty equivalent of the safer decision?

You must make one of two decisions, each with possible gains and possible losses. One of these decisions is much riskier than the other, having much larger possible gains but also much larger possible losses, and it has a larger EMV than the safer decision. Because you are risk averse and the monetary values are large relative to your wealth, you base your decision on expected utility, and it indicates that you should make the safer decision. It also indicates that the certainty equivalent for the risky decision is $210,000, whereas its EMV is $540,000. What do these two numbers mean? What do you know about the certainty equivalent of the safer decision?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section9.2: Elements Of Decision Analysis

Problem 1P

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