If a person is risk averse:
A)the certainty equivalent of a gamble is equal to the expected value of the gamble.
B)the certainty equivalent of a gamble is lower than the expected value of the gamble.
C)the certainty equivalent of a gamble is higher than the expected value of the gamble.
D)cannot be compared to the expected value of the gamble.

Question

Quizplus · Accepted Answer

A risk averse person would require a higher payoff to accept the same risk as someone who is risk neutral. This means that the certainty equivalent, which is the guaranteed amount the person would be willing to accept in lieu of the gamble, would be lower than the expected value of the gamble. Therefore, choice B is correct.

If a Person Is Risk Averse