Expected Utility: Optimal Insurance

Requires a Wolfram Notebook System

Interact on desktop, mobile and cloud with the free Wolfram CDF Player or other Wolfram Language products.

Requires a Wolfram Notebook System

Edit on desktop, mobile and cloud with any Wolfram Language product.

A lottery is played in which a person stands to obtain 1 or 10 units of wealth with probabilities and , respectively. A logarithmic utility function of wealth, , is plotted in dark blue. The blue chord represents the expected utility of the lottery, . Insurance that pays out in the event of the unfavorable outcome of obtaining only 1 unit of wealth can be purchased. The cost of the insurance is the price of the insurance times the desired level of . The orange chord represents the expected utility of the insured lottery. The optimal level of insurance yields the maximum expected utility possible, represented by the green dot.

Contributed by: Loreto Llorente (March 2011)
Open content licensed under CC BY-NC-SA


Snapshots


Details

detailSectionParagraph


Feedback (field required)
Email (field required) Name
Occupation Organization
Note: Your message & contact information may be shared with the author of any specific Demonstration for which you give feedback.
Send