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Slides11-2010

# Slides11-2010 - Outline Numerical Stu von Neumann and...

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Outline Numerical Stuff von Neumann and Morgenstern Von Neumann-Morgenstern: Lecture XI Charles B. Moss September 14, 2010 Charles B. Moss Von Neumann-Morgenstern

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Outline Numerical Stuff von Neumann and Morgenstern Numerical Stuff von Neumann and Morgenstern Axioms Ordering and Combining Charles B. Moss Von Neumann-Morgenstern
Outline Numerical Stuff von Neumann and Morgenstern Numerical Stuff In the preceding lecture, we found the expected utility of a gamble that paid \$150,000 with probability of 0.6 and \$50,000 with probability 0.4. Assuming a r = 0 . 5, the power utility function yields a certainty equivalent of \$103,569. Lets work on a slightly different problem, again assume that we have a risky gamble that pays \$150,000 with some probability p and \$50,000 with probability (1 p ). I assert that we can find a p that makes the decision maker indifferent between the risky gamble and a certain payoff of \$108,000. Naturally, we assume that p is higher than 0.6 (why?).

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