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I will propose three scenarios, and would like to see various polytubbies' responses. Note that there is no "right" answer here (though there are sets of answers which appear to be more consistent than others).
Scenario 1: A man (who can be trusted completely proposes the following game: You will pay him X$. He will flip a fair coin; if it lands heads, he will give you 100$, while if it lands tails, you will get nothing. What is the most you would give him? To be clear, if you were absolutely risk-neutral, you would pay 50$, because 50 = 0.5 * 100.
Scenario 2: Same scenario, except now the amount at stake is 50 000$. Some of you may be borrowing-constrained, so let's say that whatever you pay and whatever you win will be amortized over 10 years at 6% (compounded monthly). 50k works out to a payout of ~555$ a month over ten years. Thus, if you were risk-neutral you would offer 25k; in this case, if you lost, you would pay him (25/50)*555 = 278$ a month, and if you won he would pay you the same amount. If you were more risk-averse, you might bid 15k; if so, and you lost, you would pay him (15/50) * 550 a month, while if you won he would pay you (35/50) * 550 a month
Scenario 3: Same setup, except 250k and amortized over 25 years. 250k amortized over 25 years at 6% is ~1610$ a month, so replace the 555 from above with 1610 and the 10 years with 25
Assume, for the sake of argument, that you would pay no taxes on any winnings from any of these games. A perfectly risk-neutral individual would pay, in order, 50$, 25 000$, 125 000$. What would you pay?
Scenario 1: A man (who can be trusted completely proposes the following game: You will pay him X$. He will flip a fair coin; if it lands heads, he will give you 100$, while if it lands tails, you will get nothing. What is the most you would give him? To be clear, if you were absolutely risk-neutral, you would pay 50$, because 50 = 0.5 * 100.
Scenario 2: Same scenario, except now the amount at stake is 50 000$. Some of you may be borrowing-constrained, so let's say that whatever you pay and whatever you win will be amortized over 10 years at 6% (compounded monthly). 50k works out to a payout of ~555$ a month over ten years. Thus, if you were risk-neutral you would offer 25k; in this case, if you lost, you would pay him (25/50)*555 = 278$ a month, and if you won he would pay you the same amount. If you were more risk-averse, you might bid 15k; if so, and you lost, you would pay him (15/50) * 550 a month, while if you won he would pay you (35/50) * 550 a month
Scenario 3: Same setup, except 250k and amortized over 25 years. 250k amortized over 25 years at 6% is ~1610$ a month, so replace the 555 from above with 1610 and the 10 years with 25
Assume, for the sake of argument, that you would pay no taxes on any winnings from any of these games. A perfectly risk-neutral individual would pay, in order, 50$, 25 000$, 125 000$. What would you pay?
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