Profit Vibe: Utility Theory.

Utility Theory. - ppt download: Here the focus is on the Utility Theory Here the focus is on the Utility Theory. Before we do so let’s consider an example. Say one option for you is to take a bet that pays $5,000,000 if a coin flipped comes up tails and you get $0 if the coin comes up heads. The other option is that you will get $2,000,000 with certainty. (Say your grandmother will give you $2,000,000 if you do not bet.) EMV of the bet = .5(5,000,000) + .5(0) = 2,500,000 EMV sure deal = 1(2,000,000) = 2,000,000 Choosing the option with the highest EMV has been our decision rule. But with a sure bet we may decide to avoid the risky alternative. Would you take a sure $2,000,000 over a risky $5,000,000?