Tuesday, April 25, 2006

Assessing Risk Tolerance With A Simple Question

We’ve recently been discussing risk-aversion, expected utility hypothesis, prospect theory and a bunch of other interesting topics in my microeconomics class.

Here’s a great way to get straight to the heart of a person’s risk tolerance with just one question:

"Suppose you face a gamble where you can win $x with probability 0.5 or lose $x/2 with probability 0.5. What is the largest x for which you would be just willing to take this gamble? I’m looking for the largest x that makes you just indifferent between taking the gamble or not."
Simply brilliant!!!

Follow the link to the question for more thoughts on this and some other interesting links.

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