Problem 1 Choose Lottery A or Lottery B Lottery A Lottery B Win Win ...$2,500 with prob.33% ..$2,400 with prob.100% ..$2,400 with prob.66% ..so with prob.1% 82%of respondents chose Lottery B. According to expected utility theory: 0.33U(2500)+0.66U(2400)+0.01U(0)<U(2400) 0.33U(2500)<0.34U(2400) Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Problem 1 Win … $2,500 with prob. 33% … $2,400 with prob. 66% … $0 with prob. 1% Win … $2,400 with prob. 100% Lottery A Lottery B Choose Lottery A or Lottery B 82% of respondents chose Lottery B. According to expected utility theory: 0.33 U(2500) + 0.66 U(2400) + 0.01 U(0) < U(2400) 0.33 U(2500) < 0.34 U(2400)
Problem 2 Choose Lottery C or Lottery D Lottery C Lottery D Win Win ...$2,500 with prob.33% ..$2,400 with prob.34% ..so with prob.67% ..so with prob.66% 83%of respondents chose Lottery C.According to expected utility theory: 0.33U(2500)+0.67U(0)>0.34U(2400)+0.66U(0) 0.33U(2500)>0.34U(2400) Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Problem 2 Win … $2,500 with prob. 33% … $0 with prob. 67% Win … $2,400 with prob. 34% … $0 with prob. 66% Lottery C Lottery D Choose Lottery C or Lottery D 83% of respondents chose Lottery C. According to expected utility theory: 0.33 U(2500) + 0.67 U(0) > 0.34 U(2400) + 0.66 U(0) 0.33 U(2500) > 0.34 U(2400)