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Figure 1 Probability Distribution Probabilit y, % 20 10 40 Days ofrain per month 01234 10% 20%40%20% Probability distribution 10% 30 (a) Less Certain Probabilit y, % 20 10 40 Days ofrain per month 01234 30%40%30% Probability distribution 30 (b) More Certain
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Figure 2 Risk Aversion Utilit y, U Wealth, $1026406470 a b d e U(Wealth) U($70) = 140 0.1U($10) + 0.9U($70) = 133 U($40) = 120 U($10) = 70 0 Risk premium U($26) = 105 0.5U($10) + 0.5U($70) = c f
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Figure 3 Investment Decision Tree with Risk Aversion
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Figure 4 Investment Decision Tree with Risk Aversion (cont’d)
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Figure 5 Investment Decision Tree with Uncertainty and Discounting
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Figure 6 Investment Decision Tree with Advertising
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