Would You Take the Bird in the Hand, or a 75% Chance at the Two in the Bush?

Virginia Postrel:

Would you rather have $1,000 for sure or a 90 percent chance of $5,000? A guaranteed $1,000 or a 75 percent chance of $4,000?

In economic theory, questions like these have no right or wrong answers. Even if a gamble is mathematically more valuable -- a 75 percent chance of $4,000 has an expected value of $3,000, for instance -- someone may still prefer a sure thing.

People have different tastes for risk, just as they have different tastes for ice cream or paint colors. The same is true for waiting: Would you rather have $400 now or $100 every year for 10 years? How about $3,400 this month or $3,800 next month? Different people will answer differently.

Posted by Jim Zellmer at February 20, 2006 9:53 PM
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