Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 16 Feb 2018 My Price 6.00

investor places

13.23             An investor with assets of $10,000 has an opportunity to invest $5000 in a venture that is equally likely to pay either $15,000 or nothing. The investor's utility function can be de scribed by the log utility function U(x) = ln(x), where x is his total wealth.

 

a      What should the investor do?

 

b     Suppose the investor places a bet with a friend before making the investment deci- sion. The bet is for $1000; if a fair coin lands heads up, the investor wins $1000, but

 

 

 

if it lands tails up, the investor pays $1000 to his friend. Only after the bet has been resolved will the investor decide whether or not to invest in the venture. What is an appropriate strategy for the investor? If he wins the bet, should he invest? What if he loses the bet?

 

c       Describe a real-life situation in which an individual might find it appropriate to gamble before deciding on a course of action.

 

Source: D. E. Bell (1988) "Value of Pre-Decision Side Bets for Utility Maximizers." Management Science, 34, 797-800.

 

 

 


Answers

Maurice Tutor
(5)
Status NEW Posted 16 Feb 2018 10:02 PM My Price 6.00

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