Question

If you are offered a gamble in which you win 500 dollars 3/8 of the time and you lose 500 dollars 5/8 of the time, what is your expected payoff and your behavior given that you are a risk-lover?

Answer 1

The expected payoff is $312.50. As a risk-lover, you are likely to take the gamble because the potential reward outweighs the potential loss.

Step-by-step explanation:

If you are a risk-lover, you have a higher tolerance for uncertainty and are willing to take on greater risks for potentially greater rewards.

To calculate the expected payoff, we multiply the probability of winning (3/8) by the amount won ($500) and the probability of losing (5/8) by the amount lost ($500).

The expected payoff is calculated as follows:

Expected payoff = (3/8) * $500 + (5/8) * (-$500) = $625 - $312.50 = $312.50

Therefore, the expected payoff is $312.50. As a risk-lover, you are likely to take the gamble because the potential reward outweighs the potential loss.