Question

Define the concept of Certainty Equivalence

Answer 1

If someone receives some amount of money in return to the uncertain risk taken for the upcoming future is known as certainty equivalence. The amount received under certainty equivalence will be guaranteed. Depending upon the risk tolerance the certainty equivalence varies from individual to individual. It is used to determine the attitude of decision maker towards the unpredictable risk that happens in thee future. Certainty equivalence will be always a lesser amount than the amount that the individual may receive in future for taking the risk.