Question
Suppose Tony Stark has a von Neumann-Morgenstern utility function of the form U = Mx where M is wealth and 0 < x <1. Tony
Suppose Tony Stark has a von Neumann-Morgenstern utility function of the form U = Mx where M is wealth and 0< x <1. Tony Stark has10,000 in savings and he is considering investing it all in a new business started by the Avengers (the Avengers need exactly10,000 to start the business).
The business has a probability p (where 0.3< p <1) of doing well. If the business does well, Tony Stark will get50,000. If the business does badly, Tony Stark will get0. At the moment, Tony Stark is indierent between investing his money and keeping it in his bank.
Which of the following are true?
- aTony Stark is risk-loving.
- bTony Stark would definitely want to make the investment if x were larger.
- cTony Stark would definitely want to make the investment if he could find a partner to invest with, so that he would put in just5,000 and get25,000 in the event that the business goes well (he'd then lose only5,000 if it goes badly).
The correct answer is B and C , please explain step by step
Why when he failed, it 0 not negative -10000 when doing the expected value calculation?
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