TA Handout expected-utility

TA Handout expected-utility - Expected Utility Suppose an...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Expected Utility Suppose an agent has $1 at her disposal, and she is trying to compare the utility of one gamble, say the California state lottery, to that of another gamble, like betting on the UCLA-Stanford football game. How does she decide which gamble is preferable? When agents are comparing diFerent gambles, or lotteries , under uncertainty, we generally assume that they use the concept of expected utility to evaluate them. A lottery is simply a collection of probabilities describing the odds of a gamble’s outcomes. In our example, if the chance of winning the lottery is 1 in 1,000,000, then L StateLottery =( π win lose )= ( . 000001 ,. 999999). Similarly, if the chance of UCLA beating Stanford is 1 in 4, then L Football = ( π UCLA Stanford )=( . 25 ,. 75). The expected utility of a lottery is simply the weighted average of the utilities, weighted by the probabilities of the outcomes: EU ( L )= ° allx π x × u ( x ) In our example, if winning the lottery provides utility of 500,000, and losing yields utility of 0, then the expected utility of L
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/06/2012 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

Page1 / 2

TA Handout expected-utility - Expected Utility Suppose an...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online