Decision Analysis for Management Judgement Chapter 6, problem 4: You are an cont

Question

Decision Analysis for Management Judgement Chapter 6, problem 4:

You are an contestant ib a televsion game show and you have won 5,000 so far. You are now offered a choice: either you can keep the money and leav e or you can continue into the next round, where you have a 70% chance of increasing your winnings to 10,000 and a 30% chance of llosing the 5,000 and finishing the game with nothing.

A. Which option would you choose? B. How does your choice compare with that which would be prescribed by the expected monetary value critrtion?

Explanation / Answer

If you leave the game, then you have guaranteed 5000.

Expected value if you continue the game = 0.7 * 10000 + 0.3 * (-5000)

                                                                  = 5500

a) You will choose the scond option of continueing the game.

b) Because, even if you loose the game , yo will have extra 500 in your hand, and if you win you will have extra 5000 .

So, it's better to continue the game.

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