Certainty Equivalent

The certain and sure money or utility ('sure thing') that a subject would have to receive to be indifferent between it and a given gamble ('uncertain prospect') is called the gamble's 'certainty equivalent'. The certainty equivalent is less than the expected value of the gamble if an individual has a diminishing marginal utility of money income and obeys the axioms of expected utility theory. This indicates a kind of risk aversion. In health economics, the usual experiment contains a certain outcome, such as five years of healthy life, and an uncertain prospect consisting of the combination of two or more uncertain outcomes such as probability p of having two years of healthy life and probability (1 - p) of having 15 years of healthy life. P is then experimentally adjusted until there is indifference.

Was this article helpful?

0 0
Health And Fitness 101

Health And Fitness 101

Self-improvement is a thing which you must practice throughout your life because once you started to believe that you are perfect then, things will start to become complex. You need to know that no one is perfect and no one can be perfect.

Get My Free Ebook

Post a comment