Purpose: Elicit your subjective probability of an uncertain event occurring.
Method: Compare a bet on the uncertain event vs. a bet on the probability wheel.
Setup Your Scenario:
Deal 1: Event Bet
Win $100 if “It will rain tomorrow” happens
Win $0 otherwise
Deal 2: Wheel Bet
Win $100 if wheel lands on ORANGE
Win $0 if wheel lands on BLUE
0%100%
Orange Probability: 50%
Your Assessment:
Your subjective probability that “It will rain tomorrow” = 50%
This means you believe there’s a 50% chance the event will occur.
Utility Elicitation
Purpose: Determine the utility value of different outcomes by finding indifference points.
Method: Compare a certain outcome vs. a gamble between two other outcomes.
Setup Your Outcomes:
Deal 1: Certain Outcome
Receive $400,000 for certain
Deal 2: Wheel Gamble
Get $1,000,000 if wheel lands on ORANGE
Get $0 if wheel lands on BLUE
0%100%
Orange Probability: 50%
Utility Assessment:
The utility of $400,000 = 0.50
If you assign utility 1.0 to $1,000,000 and 0.0 to $0,
then $400,000 has utility 0.50.
Preference Probability (Equivalence Rule)
Purpose: Apply the equivalence rule to express preferences with three outcomes.
Method: Find the probability that makes you indifferent between a certain outcome and a gamble.
Setup Your Prospects:
Deal 1: Certain Middle
Receive Chronic back pain for certain
Deal 2: Wheel Gamble
Get Perfect health if wheel lands on ORANGE
Get Paralysis if wheel lands on BLUE
0%100%
Orange Probability: 50%
Preference Probability:
Your preference probability for Chronic back pain = 0.50
This means Chronic back pain is exactly halfway between Perfect health and Paralysis in your preference ranking.
Risk Attitude Assessment
Purpose: Assess whether you are risk-averse, risk-neutral, or risk-seeking.
Method: Compare a certain amount vs. a gamble with the same expected value.
Setup Your Risk Assessment:
Deal 1: Certain Money
Receive $500 for certain
Deal 2: Wheel Gamble
Get $1000 if wheel lands on ORANGE
Get $0 if wheel lands on BLUE
0%100%
Orange Probability: 50%
Risk Attitude Assessment:
Expected value of gamble: $500
Your indifference probability: 50%
Risk attitude: Risk Neutral
You are risk neutral – you value the gamble exactly at its expected value.
