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This is an experiment to elicit the risk preferences of an agent. In the experiment the agent is offered a choice between different lotteries.
This is an experiment to elicit the risk preferences of an agent. In the experiment the agent is offered a choice between different lotteries. Each of the lotteries has two possible pay-offs that are equally likely. The lotteries are given by the following table. All pay-offs are indicated in EUR. Suppose that the agents do have no initial wealth. Choice low pay-off high pay-off Lottery A Lottery B 28 24 u(w) Lottery C Lottery D Lottery E Lottery F Consider that the agent choosing has a VNM utility function (w) given by wl-y for y 0, y = 1 fory=1 1-y In(w) 20 16 12 2 28 36 44 52 60 70 1. Calculate the expected values of each lottery. 2. Which lottery would an agent with y = 0.7 pick? 3. Suppose the agent has a wealth level of 10000 EUR which lottery would the same agent with y 0.7 pick now?
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