Economic theory, prospect theory and risk attitude

Question 1

Expected value

Answer 1

shows us the value that is to be expected from engaging in a lottery (or risky situation) where there are 2 or more possible outcomes.
EV(expected value)=P(outcome 1)+(1-P)(outcome 2)

Question 2

Expected utility

Answer 2

shows us the utility that is expected out of a lottery with two or more possibilities.
EU(expected utility)=P(√(outcome 1))+(1-P)(√(outcome 2))

Question 3

examples if you need as better understanding

Answer 3

https://www.freeeconhelp.com/2014/06/expected-value-vs-expected-utility-what.html

Question 4

Difference btwn EV & EU

Answer 4

Expected utility shows the satisfaction or happiness derived from a good/service/money while expected value simply shows us the monetary value

Question 5

Risk neutral
(module 3)

Answer 5

are indifferent to risk (follow expected value.)
EX: Put $50 in the box
–The line is a straight diagonal line.

Question 6

Risk averse
(module 3)

Answer 6

prefer a sure thing, or
less risky option, with lower expected value to one
with higher expected value but higher risk
EX:Put something less than $50 in the box
-

Question 7

Risk seeking
(module 3)

Answer 7

prefer the riskier
option with higher expected value over less risky,
lower expected value option
EX:Something higher than $50.