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Game / Coin Flip

Heads : Wins 2 NOK

Tail : Loses 1 NOK

We will present two games.

We flip coin, in case of coming with a heads we win 2 NOK and with a tails we lose 1 NOK

The probability for each outcome is 50%.

We can calculate the expected value of the game that becomes 0,5 NOK

Expected value: 2 x 0,5 + (-1 x 0,5) = 0,5 NOK

Game 1

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Heads : Wins 20 mill. NOK

Tails : Loses 10 mill. NOK

Game 2 is similar, but with little different conditions.by tossing a oin one may win 20 mill NOK for heads and lose 10 mill NOK for a tail.

A preriquisit in this game is our wealth equal to 10 mill NOK.

Probability for each outcome is 50%.We can therefor calculate the expected value of the game that becomes 5 mill NOK.

Expected value : 20 x 0,5 + (-10 x 0,5) = 5 mill. NOK

Game 2

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Expected value: 2 x 0,5 + (-1 x 0,5) = 0,5 NOK

Expected value: 20 x 0,5 + (-10 x 0,5) = 5 mill. NOK

Game 1

Game 2

Both games have positive expected value, respectively 0,5 and 5 million NOK and it is advantagous.

Still majority will say no to game 2, when its value is not larger than risking whole the wealth.

We say that participants have risk aversion.