For those who know me, the result on my Certainty Equivalence graph is not at all surprising! The few times I have gambled in the past, not once have I won, so if I was to be offered a definite sum of £500 (which I chose as the sum that would make me indifferent between the other two options in this scenario), I would accept it, no questions asked. And what follows in my first graph does not get much more exciting than that. The sums of money I have chosen in the other two scenarios is (according to me) a completely sensible £250 followed by a nice and safe £750. If my financial situation had been a bit different, I would have chosen my sums differently too. So would I most likely have done if my previous experiences had been different in the past, as well as if I actually enjoyed gambling. In other words: my Certainty Equivalence graph suggests that I am risk averse.
As for my second graph, things change slightly. Simply, would there be a chance of me being given a value for certain, I am highly likely to settle. So in the first two scenarios the probability percentage I chose of winning the gamble is 95 % on both of them. Then, finally, in the third scenario in the Probability Equivalence graph I chose a 75 % of winning the gamble since the amount of value which was given for certain was low (£250). This does on the other hand, compared to my Certainty Equivalence graph, suggest that I have a risk seeking attitude. In this case, the profit of winning this bet out takes the possibility of a loss.
What you haven't really noted here is that the two graphs are quite different. It's almost as though they are describing two different people. These "utility functions" can indicate that someone is (a) risk averse, (b) risk seeking, or (c) risk neutral. What two different risk attitudes are indicated in your graphs? What do you think it means that you have obtained two different curves?
ReplyDeleteSee the note on Utility that I've added in the Announcements section of the web page.
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