Utility functions need not relate to dollar values. Here’s a
problem in which we know little about 5 abstract outcomes. What is
important however is that a person who does know what A to E represent
should be able to compare the outcomes using the lottery procedures we
A decision maker faces a risky gamble in which she may obtain 1 of 5 outcomes. Label the outcomes A, B, C, D and E.
A is most preferred, E is least preferred. She has made the following 3 assessments:
is indifferent between having C for sure or a lottery in which she wins
A with probability of 0.5 or E with probability 0.5.
She is indifferent between having B for sure or a lottery in which she wins A with probability 0.4 or C with probability 0.6.
She is indifferent between these 2 lotteries:
o 50% chance at B and 50% chance at D
o 50% chance at A and 50% chance at E
What are U(A), U(B), U(C), U(D) and U(E)?