Question

You are playing “Deal or No Deal” (simplified slightly). At this point the amounts left are $20,000, $120,000 and $1,000,000, and each has an equal chance of being in your case. The banker offers you $400,000. If you turn down the $400,000 you get what is in your case (no further offers).

If you reject the $400,000, can we conclude anything about whether you are risk averse? Explain. What if you accept the $400,000 offer, could we then draw a definite conclusion about whether you are risk averse? (Hint: This scenario is equivalent to one where you are first given $400,000 and then asked if you are willing to pay $400,000 for an equal chance of one of the three cases. Think about it. Rejecting the banker’s offer means you are willing to pay at least $400,000 to take this gamble.)

Answer 1

Case 1) when the offer us rejected, it implies that individual is risk lover, as rather than accepting a definite amount to avoid any uncertainty in future payoff from gbamble, individual loves to try his luck & play the gamble, in hopes of winning 10 lakh , instead of getting 4 lakh today.

Case 2)

Since a definite amount has been accepted, taking in to account the fact that he could have got 10 lakh in future via gamble, but seeing uncertainty, individual decides to go for a certain situation, hence he is willing to avoid risk , so Risk Averse .