A manager believes there is a 5 percent chance their firm will have to pay $1,000,000 and a 95 percent chance they will be found innocent and pay nothing except the legal fees of $100,000. If the manager chooses to not enter into the litigation and to settle for $150,000 (pay the plaintiff), which of the following is true?

Question

Quizplus · Accepted Answer

The manager is risk averse as they are willing to pay $150,000 (an amount greater than the legal fees) to avoid the risk of potentially having to pay $1,000,000. A risk neutral manager would be willing to take the chance and go to trial. A risk lover may even prefer to go to trial, hoping for the small chance of paying nothing or potentially winning damages. Risk intolerance refers to a situation where an individual or firm is unable or unwilling to bear any risk at all. This situation does not apply here as the manager is willing to take some level of risk by considering litigation.

A Manager Believes There Is a 5 Percent Chance Their