13 Joe is a riskaverse decision maker Which of the following

13 Joe is a risk-averse decision maker. Which of the following lotteries will he prefer? L1: With probability .10, Joe loses $100. With probability .90, Joe receives $0. L2: With probability .10, Joe loses $190. With probability .90, Joe receives $10.

Solution

L1:

The mean= 100*0.1+0*0.9 =10

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L2:

The mean= 190*0.1+10*0.9 =28

Since 28 is larger than 10, L1 pefer.