Discuss the use of the probability-equivalent approach

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Reference no: EM131524633

Question: When you choose a place to live, what objectives are you trying to accomplish? What makes some apartments better than others? Would you rather live close to campus or farther away and spend less money? What about the quality of the neighborhood? How about amenities such as a swimming pool? Create a fundamental-objectives hierarchy that allows you to compare apartment options. Take care in doing this; be sure to establish the fundamental objectives and operational attributes that will allow you to make the necessary comparisons. Once you are satisfied with your hierarchy, use it to compare available housing alternatives. Try ranking different apartments that are available. Be sure that your individual utilities follow the rules: Best takes a 1 and worst takes 0. (Try using the utility function for money that you assessed in Problem. You may have to rescale it so that your best alternative gets a 1 and worst gets a 0.) Assess weights using pricing out, swing weighting, or lottery weights. Evaluate your alternatives with the additive utility function.

Problems: Assess your utility function in three different ways.

a. Use the certainty-equivalent approach to assess your utility function for wealth over a range of $100 to $20,000.

b. Use the probability-equivalent approach to assess U($1,500), U($5,600), U($9,050), and U($13,700). Are these assessments consistent with the assessments made in part a?

c. Use the trade-off method to assess your utility function for values ranging from $100 to $20,000.
Plot the assessments from parts a, b, and c on the same graph and compare them. Why do you think they differ? Can you identify any biases in your assessment process?

Reference no: EM131524633

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