Rack Your Brain Here. Part Ii!

[Almighty Colin]

According to game theorists, the "expectation value" (EV) is what is important.

expectation value (EV) = Probability * amount.

50% * $2000 = $1000 so there is the same amount on both sides of the equation and it is equally logical to choose either option. Making such decisions based on "expectation value" over one's lifetime will leave one with the most money.

In real life, the majority of the people choose the sure thing. One experiment gave people a choice between an 80% chance of winning $4000 or a sure $3000. 80% chose a sure $3000 - inferior according to EV based decision. I would think one's answer depends on how much money one has or how much $3000 means to you.

People offered a choice between losing $3000 or an 80% chance of losing $4000 chose the risk 92% of the time.

According to the researchers, people are risk averse when the choice involves gains and risk seekers when it comes to losses. According to Tversky "It is not so much that people hate uncertainty - but rather, they hate losing" and "people are much more sensitive to negative than to positive stimuli".