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Introduction
First of all it is interesting introduce some denition. Assume there is a lottery with payos xL = 2 with
probability 0.5 and xH = 10. The expected payo is equal to
x = 0:5(10 + 2) = 6
Let dene U (x) the utility associated with the expected payo, while E(U (x)) = 0:5(U(10) + U (2)) is the
expected payo associated with the lottery.
We say that an agent participating to the lottery is risk avers if
U (x) > E(U (x))
an agent is risk neutral if
U (x) = E(U (x))
and nally is risk lover if
U (x) < E(U (x))
The certain equivalent is the amount an agent is ready to accept for not participating to the lottery. In the
case of the risk avers the certain equivalent CE corresponds to the amount xCE such that E(U (x)) = U (xCE ).
In the case of the risk avers agent xCE x.
70 = 18
EM Vuncert = 92:4
84 = 8:4
It is clear that the price for solving uncertainty is dierent if we focus on plan B. In this case, we have three
alternative to compare:
1. B-low vs plan A (we prefer A with an expected return of 84);
2. B-average vs plan A (again we prefer plan A with an expected return of 84)
3. B-high vs plan A (we prefer B with a return of 100)
EMV under perfect info is equal to
EM VP I = 84 0:2(prob:low) + 84 0:5(prob:average) + 100 0:3(prob:high) = 88:8
The price ready to pay is equal to
price = EM VP I
EM Vuncert = 88:8
84 = 4:8