Hi,
I was having trouble understanding the following statement and after some investigating I think there is a mistake: Chapter 2, Section 3.2
"Consider the certainty equivalent of a gamble. For a risk-averse individual this is higher than the actual likelihood of the outcome."
I have assumed that the 'actual likelihood of the outcome' is the expected outcome of the gamble, ie. Sum of (probabilities x gamble returns).
I think this should read, "For a risk-averse individual this is lower than the actual likelihood of the outcome."
E.g. a risk-averse individual and a fair gamble; the 'actual likelihood of the outcome' is 0, but the certainty equivalent is negative, hence lower.
Am I correct in this line of thought?
Last edited by a moderator: Feb 18, 2020