Suppose that the point spread for a particular sporting even

Suppose that the point spread for a particular sporting event is 10 points and that with this spread you are convinced you would have a .60 probability of winning a bet on your team. However, the local bookie will accept only a $1000 bet. Assuming that such bets are legal, would you bet on your team? (Disregard any commission charged by the bookie). Remember that you must pay losses out of your own pocket; Your payoff table is as follows:


State of Nature

Decision Alternatives You Win You Lose

Bet $1000 -$1000

No Bet $0 $0


a. What decision does the expected value approach recommend?

b. What is your indifference probability for the $0 payoff? Be realistic…

c. What decision would you make based in the expected utility approach? In this case are you a risk take or risk avoider?

d. Would other individuals assess the same utility values you dO/ explain

e. If your decision in part (c) was to place the bet, repeat the analysis assumin a minimum bet of $10,000.

Additional Requirements

*Show all work

Solution

Bet 1000   -1000

Prob 0.6     0.4

Expected win= 1000(0.6)-1000(0.4)

= 200

a) As expected gain is positive, better to play the game.

b) For 0 payoff prob should be 0.5

Then 1000(0.5)-1000(0.5) =0 will be pay off

c) For a risk taker playing the game would be decision.

For non risk taker, not playing the game.

d) Risk taking/taking is independent for each. Hence each person decision will be independent.

e) If 10000 is the bet and in c, decided to play for 10000 may not decide to play.

As I do not want to take risk for a big amount as 10000.