you see a problem on slide 2. For this problem redo slide 4 for a RISK NEUTRAL person and verify that the decision alternative picked using the expected utility method is the same as picked with the expected monetary value method for this risk neutral person. In this section we have a problem where we have the following payoff table States of Nature Alternatives s1 s2 di 30000 20000 -50000 d2 50000 -20000 -30000 d3 0 0 0 s3 If we have P(sl) = .3, P(s2) = .5, and P(s3) = .2, then the EMV of each alternative is (as we saw in the past): di .3(30000) + .5(20000) +.2(-50000) = 9000 d2 .3(50000) + .5(-20000) +.2(-30000) = -1000 2 d3 .3(0) + .5(0) +.2(0) = 0 Now here are the utility values for each monetary value. States of Nature Alternatives s1 s2 s3 di 9.5 9. 0 d2 10 5.5 4.0 d3 7.5 7.5 7.5 We had P(sl) = .3, P(52) = .5, and P(s3) = .2. Next we calculate the expected utility of each alternative. The calculation is similar to the EMV calculation. The expected utility for each is di .3(9.5) + .5(9.0) +.2(0) = 7.35 d2 .3(10) + .5(5.5) + .2(4.0) = 6.55 d3 .3(7.5) + .5(7.5) +.2(7.5) = 7.5 Option 3 has the best expected utility, so we choose option 3. Option 3 is to do nothing here. Option 1, while having the best EMV, also has a 20% chance of losing 50,000. Expected utility theory incorporates our subjective view of the loss and here rules out that risk