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Expected Value and Risk Aversion

Written by Poker Penguin
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Expected Value isn't as simple as we think
Welcome to my second article on economics / game theory.

People value money. Everyone who hasn`t taken a vow of poverty would rather have more money than less (Duhh). However, people value risk differently. For example. Let`s say you won a magical prize from happyland. Would you rather have $100 or a 50% shot at 200? The Expected Value (EV) is the same, so if you`re a good poker player, you would say "it depends".

Actually, good poker players seem to say "it depends" a lot. But anyway. That example isn`t very interesting. But what if the choice was between $100 and a 50% shot at S201? Technically, the EV is marginally higher if you take the coin toss. However, many people will give up the 50 cents in order to get a sure $100. They are what we would call risk averse.
The opposite is of course, risk seeking. These people would take a coin toss for $199 over a sure $100. Well, in theory anyway.


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