A fair american roulette wheel has 38 possible outcomes that

A fair american roulette wheel has 38 possible outcomes that occur with equal probability. Each slot is numbered and there are 2 green, 18 black, 18 red outcomes. Consider the following bets, if money corresponds to utility, which has the highest expected utility? Explain what someone who was risk averse would do if they had to place one of these bets. For simplicity, think of only two possible consequences for each act: winning or losing.

Solution

Total outcomes = 38

Prob for each = equal

Green 2, black 18, red 18

Outcomes are winning or losing

If money corresponds to utility then highest utility is for black and red as they have more chances to win.

Risk averse people always want to be cautious while betting so the select the least pay 1 at 1 or red.