Asked by
Carmen Peralta
on Oct 14, 2024
Verified
In an experiment on risk aversion, a group of people were given the following choice: A) Lose $100 with certainty, or B) 50% chance to win $50, 50% chance to lose $200.An overwhelming majority chose option B.This can be best explained by which of the following?
A) People have a greater aversion to loss than to risk.
B) Option B has a smaller expected loss than option A.
C) This behavior is consistent with risk aversion with losses.
D) Option B has an expected gain as opposed to certain loss with option A.
E) This behavior violates the Weak Axiom of Revealed Preference.
Expected Loss
The predicted amount of loss a business might suffer due to risks, calculated as the sum of all possible losses multiplied by their respective probabilities.
Weak Axiom
A principle used in consumer choice theory that stipulates if a consumer chooses bundle A over bundle B when both are affordable, then the consumer should not choose B over A when prices change, holding income constant.
- Appreciate the importance of perceiving risks and deciding in scenarios characterized by uncertainty.
Verified Answer
KS
Learning Objectives
- Appreciate the importance of perceiving risks and deciding in scenarios characterized by uncertainty.