Suppose one is offered a gamble in which you win $1,000 half the time but lose $1,000 half the time. Since in this case one is as likely to win as to lose the $1,000, the average payoff on this gamble-its expected value-is:
0)5 ∗ $1,000 + 0.5 ∗ (-$1,000) = 0.
Under such circumstances:

Question

Quizplus · Accepted Answer

Risk averse individuals would not take the gamble because the potential loss of $1,000 outweighs the gain of $1,000. However, risk lovers and risk neutral individuals may take the gamble because they are not as concerned about potential losses and may focus more on the potential gain. The expected value of the gamble is 0, but some individuals may still choose to take the risk for the chance of winning $1,000.

Suppose One Is Offered a Gamble in Which You Win