Consider the following statement “For two gambles with the same expected value, a risk-averse individual will...

Consider the following statement

“For two gambles with the same expected value, a risk-averse individual will be indifferent between the two gambles.”

Do you agree with the statement? With the use of an appropriate diagram(s), explain your answer.

Solutions

Expert Solution

First we need to understand what is Risk Aversion- So risk aversion means that a person believes in less returns with known risk than more returns with Unknown risks.
I do agree, that for same expected value in a gamble ,a risk averse individual will be indifferent between the two gambles.
This theory can be explained with an example- A rich person who loves gambling will not care if he loses some amount of money because he keeps his interest for gamble more than his income. So he might take more risks upto certain level.
Whereas a farmer who depends on rainfall for an irrigation might think that whether he should crop or not .Until he gets sure there will be an abundant amount of rainfall in an year. But there are other farmers also whose mentality is little different who thinks doesn't matter if it rains or not they still crop and leave it in the hands of luck. So risk aversion is different for different individuals.

Rahul Sunny answered 8 months ago

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