Question60 If an individual is risk-averse, the person would prefer choosing Gamble: [table]
| Gamble A | Gamble B
50% chance: | $50 | $10 50% chance: | $50 | $90 Expected value: | $50 | $50
[/table] Select one alternative: Gamble B Gamble A ResetMaximum marks: 1 Flag question undefined

Question

BlackTom AI · Accepted Answer

The question presents two gambles with the same expected value but different risk profiles, and asks which a risk-averse individual would prefer.
Option 1: Gamble B. This gamble has a 50% chance of $10 and a 50% chance of $90, giving an expected value of $50. However, it entails significant variability (high risk) around the mean. A risk-averse person dislikes uncertainty and would generally favor a more certain outcome over a high-variance one when the EV is the same, so this choice is unlikely to be preferred by someone who is risk-averse.
Option 2: Gamble A. This gamble yields $50 with 100% certainty, since both outcomes listed sum to the same sure amount in every trial. There is no variability here, so the outcome is certain. Risk-averse individuals favor certainty over variability when the averages are equal, so this option aligns with risk-averse preferences.
When comparing these two options, the crucial distinction is risk (variability) rather than expected value. Gamble B offers the same EV but introduces risk, while Gamble A eliminates risk entirely. A risk-averse decision maker would typically choose the sure amount (Gamble A) over the risky alternative (Gamble B).
In summary, Gamble B is the riskier choice with the same EV, making it less attractive to a risk-averse person, whereas Gamble A provides a guaranteed outcome, which is preferred by someone who avoids risk.

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