Let L1 and L2 be two lotteries with the same expected return. Suppose L2 has a larger variance and you are risk averse. Would your CE for L2 be larger or smaller than your CE for L1?

Question

Presley Moyer

Business

20 May, 13:23

Let L1 and L2 be two lotteries with the same expected return. Suppose L2 has a larger variance and you are risk averse. Would your CE for L2 be larger or smaller than your CE for L1?

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Stella Bradshaw · Answer 1

option 2) smaller

As CE is the amount which if the agent gets with certainty, then agent will be indifferent between playing lottery or getting that amount with certainty

So L2 is more risky, & agent is risk averse, so agent will be ready to accept a lower amount with certainty (as compared to the amount for a safer option : L1)

So CE of L2 will be lower