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 don’t think I can be expected to take seriously any game which takes less than three days to reach its conclusion.”
—Tom Stoppard (b. 1937)
“I think there is choice possible at any moment to us, as long as we live. But there is no sacrifice. There is a choice, and the rest falls away. Second choice does not exist. Beware of those who talk about sacrifice.”
—Muriel Rukeyser (1913–1980)
“Do you want me to tell you something really subversive? Love is everything it’s cracked up to be. That’s why people are so cynical about it.... It really is worth fighting for, being brave for, risking everything for. And the trouble is, if you don’t risk anything, you risk even more.”
—Erica Jong (b. 1942)