POLI 360 Lecture Notes - Lecture 3: Weighted Arithmetic Mean
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Expected utility: + for heads, no penalty for tails, + for heads, - for tails. Method: (cid:498)the weighted average of all the possible outcomes within a probability distribution(cid:499) E(b)= (1/2x20) (1/2x20)=0: (cid:498)flip a coin(cid:499), + if right, (cid:498)roll a dice(cid:499), + if right. Answer: you should chose option (a), because it has a higher expected value. Which of these two deals should you take? (no penalty for being wrong in both choices) Answer: both have the same expected utility (aka. in the long run, both will average out to the same payoff)! * however, people who are risk averse would be more likely to take (a) and people who are risk acceptant would be more likely to take (b) You have three opportunities to score a basket. If you score at least one +. Probability that i miss all 3 = x x = 1/8.
