4 ms·
Say you can pay $10k and get (50/50) either $0 or $22k. The expected gain is $1k. A second game also costs $10k to enter, but the (50/50) payouts are $9k and $
by kgwgk 7y ago
Say you can pay $10k and get (50/50) either $0 or $22k. The expected gain is $1k.
A second game also costs $10k to enter, but the (50/50) payouts are $9k and $13k.
Do you find then equally attractive? Most people wouldn’t.
If you do, what if you could instead “play” a game where you pay $10,000 and get $10,999 straight away? It’s a worse proposition if you’re risk-neutral, isn’t it?
- kgwgk 7y agoAnd while it’s true that if markets were efficient you wouldn’t be compensated for diversifiable risk it’s also true that a) markets are not efficient and b) uncertainty in the results of companies is correlated with the market and not completely diversifiable.