The certainty equivalent is less than the expected value of a gamble when tastes are risk averse.

Question

Quizplus · Accepted Answer

When a person is risk averse, they dislike uncertainty and are willing to pay a premium to avoid taking risks. The certainty equivalent is the amount of money that, if offered with certainty, a person would be willing to accept instead of taking a gamble with an uncertain outcome. Since risk-averse individuals are willing to pay a premium to avoid uncertainty, the certainty equivalent will always be less than the expected value of a gamble. Therefore, the statement is true for risk-averse individuals.

The Certainty Equivalent Is Less Than the Expected Value of a Gamble