Certainty Equivalent Wealth

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This graphic visualizes the certainty equivalent wealth of a "lottery," meaning the amount of money which, if held, would yield with absolute certainty the same expected utility to someone as the lottery. The concept of certainty equivalent wealth is central to the understanding of rational behavior under uncertainty and to the regulation of behavior in such circumstances. The Demonstration presents a simple model in which the user may vary three sliders: the probability that the individual will be in position 1, the wealth associated with position 1, and the wealth associated with position 2. The user may also select from three possible utility functions.

Contributed by: Seth J. Chandler (March 2011)
Open content licensed under CC BY-NC-SA


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