Question
You have just made a loss of 100, when someone offers you the following gamble. To enter into the gamble, you will first need to
You have just made a loss of 100, when someone offers you the following gamble. To enter into the gamble, you will first need to pay a fee of 12. Once entered, the gamble will give you a 10% chance of recovering both your 100 loss and the 12 fee, and break even. However, there is also a 90% chance that you will get nothing (which means losing your 12 entrance fee and not recovering any of the original 100 loss). Which ONE of the following statements is FALSE.
Without the gamble you have a 100 loss for sure. | ||
With the gamble, you face an expected loss of (100+12)*(0.90) + 0*(0.10) = 100.8. | ||
The gamble has a negative expected payoff of [0.10*(100 + 12) + 0.90*0 - 12] = -0.8 | ||
To analyse the problem correctly, investors should recognise that the 100 loss is a sunk cost. | ||
(Tick this option if you think that none of the statements listed are false.) |
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