Solution-Betting on the outcome of the next presidential

Betting on the outcome of the next presidential election

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Reference no: EM131754882

Question: James is thinking about betting on the outcome of the next presidential election. An online betting service offers him a deal where he can bet $ 1000 on a Democratic, Republican, or third-party victory. If he bets on a Democratic victory, he will win $1500 if a Democratic candidate wins the election. If he bets on a Republican victory, he will win $2000 if a Republican candidate wins. If he bets on a third-party victory, he will win $20,000 if a third-party candidate wins. In any case, if another type of candidate wins, and not the one James bet on, he receives $0

James believes that there are 70%, 25%, and 5% chances of Democratic, Republican, and third-party victories respectively.

James values a dollar today the same way he will after the election, so the time value of money is not an issue. You don't know James's risk attitude or u-curve, however you do know that he follows the five Rules of Actional Thought and prefers more money to less.

Which of the following statements MUST be true?

a. James should bet on a Democratic victoiy if he is risk-averse and on a third-party victory otherwise.

b. Regardless of his w-curve, James should never bet on a third-party victory.

c. Regardless of his w-curve, James should never bet on a Republican victory.

d. None of the above statements MUST be true.

Reference no: EM131754882

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Betting on the outcome of the next presidential election

Reference no: EM131754882

Reference no: EM131754882

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