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s1 s2 s3 d1 d2: Decision Alternative State of Nature

Three decision makers assessed the payoffs for two decision alternatives across three states of nature. Decision maker A is risk averse, decision maker B is moderately risk averse, and decision maker C is risk neutral. For a payoff of 40, decision maker A would pay a premium to avoid risk while decision maker B would pay a premium to have the opportunity of a higher payoff.

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114 views4 pages

s1 s2 s3 d1 d2: Decision Alternative State of Nature

Three decision makers assessed the payoffs for two decision alternatives across three states of nature. Decision maker A is risk averse, decision maker B is moderately risk averse, and decision maker C is risk neutral. For a payoff of 40, decision maker A would pay a premium to avoid risk while decision maker B would pay a premium to have the opportunity of a higher payoff.

Uploaded by

Al Borja
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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47.

 Three decision makers have assessed payoffs for the following decision problem (payoff in
dollars).

Decision State of Nature


Alternative s1 s2 s3
d1 15 40 –20
d2 60 80 –80

The indifference probabilities are as follows:

  Indifference Probability (p)


Decision
Payoff Decision Maker A Decision Maker C
Maker B
Does not
80 Does not apply Does not apply
apply
60 0.70 0.95 0.87
40 0.50 0.90 0.74
15 0.30 0.80 0.59
–20 0.15 0.60 0.37
Does not
–80 Does not apply Does not apply
apply

a. Plot the utility function for money for each decision maker.
b. Classify each decision maker as a risk avoider, a risk taker, or risk neutral.
c. For the payoff of 40, what is the premium that the risk avoider will pay to avoid risk? What is
the premium that the risk taker will pay to have the opportunity of the high payoff?

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