Suppose that a decision maker has the following utility function:
U (x) = €“ 0.000156 x2 + 0.028125 x €“ 0.265625
Use this utility function to calculate risk premiums for the gambles shown in Tables 14.3 and 14.4; create a similar table but based on this quadratic utility function. How would you classify the risk attitude of a decision maker with this utility function? Does such a risk attitude seem reason-able to you?
Table 14.3

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50-50 Gamble Between (S) 10, 40 20, 50 30, 60 40, 70 Expected Value (S) 25 35 45 Certainty Equivalent (S) 20.00 31.62 42.43 52.92 Risk Premium (S) 5.00 3.38 2.57 2.08