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Certainty Equivalent

When examining the potential outcomes a given event may hold, a person is likely to approximate the probability of each possible result. Taken into consideration by the individual is the degree to which any of these outcomes may be certain. That is, although the benefit derived from an event with a lesser or unknown likelihood of occurring may be much greater, people often tend to opt for the less advantageous, although more certain, outcome. An influential variable, however, is to what degree the individual finds the certain outcome to be of value. Thus, certainty equivalents are the amount of utility, or usefulness, that a person will consider to forgo an offered gamble. When the person becomes indifferent between the choice of a certain event and ...

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