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? a. $500, take the gamble b. -$125, take the gamble c. -$125, it is unclear what you would do without further information d. $500, decline the gamble e. -$125, decline the gamble

Answer 1

If you are a risk-lover, you would take the gamble. The expected payoff is -$125. As a risk-lover, you would still take the gamble.

Step-by-step explanation:

If you are a risk-lover, you would take the gamble. To find the expected payoff, you multiply the amount you can win ($500) by the probability of winning (3/8) and subtract the amount you can lose ($500) by the probability of losing (5/8).

Expected Payoff = (500 * 3/8) - (500 * 5/8)

= (1500/8) - (2500/8)

= -1000/8

= -125.

Therefore, the expected payoff is -$125. So, your expected average loss per gamble is $125. As a risk-lover, you would still take the gamble.