Descriptive theories of rationality

Question 1

A very common and sensible assumption

• The first dollar you have goes directly into needs like food, the millionth not so much
• The difference between $0 and $10 is much more noticeable than the difference between $1,000,000 and $1,000,010

Implies that your utility as a function of wealth is ________…

Answer 1

A very common and sensible assumption

• The first dollar you have goes directly into needs like food, the millionth not so much
• The difference between $0 and $10 is much more noticeable than the difference between $1,000,000 and $1,000,010

Implies that your utility as a function of wealth is concave…

Question 2

Expected value:
Your long-run “average”
What is to be expected if you choose an option an infinite number of times
EV = p(occurring) * (potential outcome) + p (not occurring) * (potential outcome)