Todd has $1000. He is given a choice of flipping a coin, heads wins $1000 while tails loses $500. Todd refuses to accept the gamble. A possible explanation is that:
A) Todd is loss averse; so he prefers to avoid the gamble since his expected utility will be negative even though the expected value of the gamble is positive.
B) Todd is risk neutral; so he prefers to avoid the gamble even though both the expected utility and the expected value of the gamble are positive.
C) Todd is risk neutral; so he prefers to avoid the gamble since both the expected utility and the expected value of the gamble are negative.
D) Todd is loss averse; so he prefers to avoid the gamble even though both the expected utility and the expected value of the gamble are positive.

Question

Quizplus · Accepted Answer

DBoth A and D suggest that Todd is loss averse, which is a common reason why individuals might avoid gambles that have a positive expected value but also involve a significant risk of losing money. Loss aversion is a concept in behavioral economics indicating that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. In this case, the fear of losing $500 outweighs the potential gain of $1000 for Todd, leading him to avoid the gamble despite its positive expected value. The difference between A and D is in the explanation of expected utility versus expected value, but both choices correctly identify loss aversion as the reason for Todd's decision.

Todd Has $1000