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BDuring the last lecture we were given a simple test to understand how utility can be measured. There are two methods of measurement Certainty Equivalent method and Probability Equivalent method. The outcome of that exercise is presented in the above graphs. Horizontal axes represents monetary values and the vertical ones utility values. The task was to state the amount of money that would make us indifferent between that amount and a gamble. Graph A shows you that the higher the certain amount the higher must be the the chance of winning a gamble. Graphs suggests that I am more likely to gamble when the certain amount of money is small. Although the 2 graphs are fairly ssimmilar, there are some differences. As you can see the higher the probability of a satisfactory outcome the more likely I will go for the certain option.
I have found relevant article that can give you a better understanding of the utility measurment. If you are interested you can download it for free via London Metropolitan on line library. (as long as you are studying there off course!)
"Perceptual accuracy and conflicting effects of
certainty on risk-taking behaviour"
I see with the probability equivalence method you show very little change in utility between £700 and £1000; but with the certainty equivalence method this isn't the case - you still show quite a large-ish increase in utility between those two monetary values. Of course, we only have a small number of data points here, but discrepancies of this kind are rather problematical for the measurement of utility.
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