This value of 1.8 has been obtained by asking the individual basically what level of wealth would make them half as happy as they would be if their wealth is 4.
(More precisely, it's the level of wealth that they would need to have to be indifferent between that level of wealth and a gamble that gave them 0 or 4, with equal probability.)
So you can't calculate this value of w from anything - it's just what the individual has answered and could be any value between 0 and 4.
The fact that they are half as happy when wealth is 1.8 as when wealth is 4 means that if U(4)=1, then U(1.8)=0.5.
Last edited by a moderator: Apr 10, 2009