Suppose that the point spread for a particular sporting event is 10 points and that with this spread you are convinced you would have a 0.60 probability of winning a bet on your team. However, the local bookie will accept only a $1000 bet. Assuming that such bets are legal, would you bet on your team? (Disregard any commission charged by the bookie.) Remember that you must pay losses out of your own pocket. Your payoff table is as follows:
....................................................... State of Nature
Decision Alternatives ....... You Win ............... You Lose
Bet ................................ $1000 .................... -$1000
Don't bet ............................ $0 .......................... $0
a. What decision does the expected value approach recommend?
b. What is your indifference probability for the $0 payoff? (Although this choice isn't easy, be as realistic as possible. It is required for an analysis that reflects your attitude toward risk.)
c. What decision would you make based on the expected utility approach? In this case are you a risk taker or a risk avoider?
d. Would other individuals assess the same utility values you do? Explain.
e. If your decision in part (c) was to place the bet, repeat the analysis assuming a minimum bet of $10,000?