Question: Assess your risk tolerance (R). Now rescale your exponential utility function-the one you obtain by substituting your R value into the exponential utility function-so that U($100) = 0 and U($20,000) = 1. That is, find constants a and b so that a + b(1 -e-100/R) = 0 and a + b(1 - e-20;000/R) = 1. Now plot the rescaled utility function on the same graph with the utility assessments from Problem. How do your assessments compare?
Problem: Assess your utility function in three different ways.
a. Use the certainty-equivalent approach to assess your utility function for wealth over a range of $100 to $20,000.
b. Use the probability-equivalent approach to assess U($1,500), U($5,600), U($9,050), and U($13,700). Are these assessments consistent with the assessments made in part a?
c. Use the trade-off method to assess your utility function for values ranging from $100 to $20,000.
Plot the assessments from parts a, b, and c on the same graph and compare them. Why do you think they differ? Can you identify any biases in your assessment process?