Assume that point spread for particular sporting event is ten points and that with the spread you are convinced you would have 0.60 probability of winning the bet on the team. Though, local bookie will accept only the $1000 bet. Suppose that such bets are legal, would you bet on the team? Remember that you should pay losses out of the own pocket. The payoff table is as follows:
State of Nature
Decision Alternatives Win s1 Loses s2
Bet $1000 -$1000
Don't Bet 0 0
i) What decision expected value approach recommends?
ii) Find indifference probability for $0 payoff? Though this choice is not easy, be as realistic as possible. It is needed for the analysis which reflects the attitude toward risk.
iii) What decision would you make based on expected utility approach? In this case are you risk taker or risk avoider?
iv) Would other individuals analyzes same utility values you do? Describe.
v) If the decision in part (c) was to place bet, repeat analysis assuming mini-mum bet of $10,00.