A contestant on a game show has a choice between taking $1,500 in cash or a prize hidden behind a curtain. The prize behind the curtain could be worth thousands of dollars or nothing. The expected value of the prize behind the curtain is $2,500. If the contestant is risk neutral, then the contestant will

Question

Darren Adkins

Business

2 October, 06:27

A contestant on a game show has a choice between taking $1,500 in cash or a prize hidden behind a curtain. The prize behind the curtain could be worth thousands of dollars or nothing. The expected value of the prize behind the curtain is $2,500. If the contestant is risk neutral, then the contestant will

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Answers (1)

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Ronin Durham · Answer 1

The correct answer is: the contestant will choose the prize behind the curtain.

Explanation:

To begin with, the concept of ''risk neutral'', in the field of finance, refers to a mindset where the individual is indifferent to risk at the time of making a decision regarding finances, so therefore that a risk neutral person does not focus on the risk of the operation due to the fact that this mindset is totally emotional and not rational at all. To sum up, if the contestant is risk neutral then the obvious option to make will be to choose the prize behind the curtain due to the fact that its expected value is higher that the other prize.