An individual is uncertain whether to bet on a football game. He believes that the probability of his team winning is 40%. If his team wins, he will receive $180. If his team loses, he'll pay $120. If the decision is based on the expected value criterion, then the individual will:
A) not take the bet if he is risk loving.
B) be indifferent to the bet if he is risk-neutral.
C) take the bet only if he is risk averse.
D) not take the bet if he is risk averse.
E) Answers b and d are both correct.

Question

Quizplus · Accepted Answer

The expected value (EV) of the bet is calculated as follows: EV = (0.4 * $180) - (0.6 * $120) = $72 - $72 = $0. A risk-neutral person is indifferent to the bet when the EV is $0, which matches choice B. A risk-averse person dislikes risk and prefers not to lose money, making choice D correct as they would not take a bet with an EV of $0. Choices B and D are both correct, making E the right answer.

An Individual Is Uncertain Whether to Bet on a Football