Cal has a choice between two gambles. The first gamble offers a 50 percent chance of winning $20 and a 50 percent chance of losing $20. The second gamble offers a 20 percent chance of winning $100 and an 80% chance of losing $20. Which choice has the higher expected value?
A)The expected value of both gambles is the same, so Cal would be indifferent between the two.
B)The expected value of the first gamble is higher.
C)The expected value of both gambles is the same, but Cal would prefer the first gamble since the chances of winning are higher.
D)The expected value of the second gamble is higher.

Question

Quizplus · Accepted Answer

The expected value of the first gamble is $0 (= 0.50 × $20 - 0.50 × $20).  The expected value of the second gamble is $4 (= 0.20 × $100 - 0.80 × $20).

Cal Has a Choice Between Two Gambles