Expected Value and Choice Under Risk
In the presence of risky outcomes, a decision maker could use the expected value criterion as a rule of choice: higher expected value investments are simply the preferred ones. For example, suppose there is a gamble in which the probability of getting a $100 payment is 1 in 80 and the alternative, and far more likely, outcome, is getting nothing. Then the expected value of this gamble is $1.25. Given the choice between this gamble and a guaranteed payment of $1, by this simple expected value theory people would choose the $100-or-nothing gamble. However, under expected utility theory, some people would be risk averse enough to prefer the sure thing, even though it has a lower expected value, while other less risk averse people would still choose the riskier, higher-mean gamble.
Read more about this topic: Expected Utility Hypothesis
Famous quotes containing the words expected, choice and/or risk:
“I call it our collective inheritance of isolation. We inherit isolation in the bones of our lives. It is passed on to us as sure as the shape of our noses and the length of our legs. When we are young, we are taught to keep to ourselves for reasons we may not yet understand. As we grow up we become the “men who never cry” and the “women who never complain.” We become another generation of people expected not to bother others with our problems.”
—Paula C. Lowe (20th century)
“... given a choice between hearing my daughter say “I’m pregnant” or “I used a condom,” most mothers would get up in the middle of the night and buy them herself.”
—Joycelyn Elders (b. 1933)
“Combining paid employment with marriage and motherhood creates safeguards for emotional well-being. Nothing is certain in life, but generally the chances of happiness are greater if one has multiple areas of interest and involvement. To juggle is to diminish the risk of depression, anxiety, and unhappiness.”
—Faye J. Crosby (20th century)