Prosjektstyring Game / Coin Flip Heads: Wins 2 NOK Tail: Loses 1 NOK We will present two games. We flip coin, in case of coming with a heads we win 2 NOK and with a tails we lose 1 NOK The probability for each outcome is 50%. We can calculate the expected value of the game that becomes 0,5 NOK Expected value: 2 x 0,5 + (-1 x 0,5) = 0,5 NOK Game 1

Prosjektstyring Heads: Wins 20 mill. NOK Tails: Loses 10 mill. NOK Game 2 is similar, but with little different conditions.by tossing a oin one may win 20 mill NOK for heads and lose 10 mill NOK for a tail. A preriquisit in this game is our wealth equal to 10 mill NOK. Probability for each outcome is 50%. We can therefor calculate the expected value of the game that becomes 5 mill NOK. Expected value : 20 x 0,5 + (-10 x 0,5) = 5 mill. NOK Game 2

Prosjektstyring Expected value: 2 x 0,5 + (-1 x 0,5) = 0,5 NOK Expected value: 20 x 0,5 + (-10 x 0,5) = 5 mill. NOK Game 1 Game 2 Both games have positive expected value, respectively 0,5 and 5 million NOK and it is advantagous. Still majority will say no to game 2, when its value is not larger than risking whole the wealth. We say that participants have risk aversion.