Risk tolerance
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ASSESSING RISK TOLERANCE WITH A SIMPLE GAMBLE
Want to estimate risk tolerance with just one question? Thanks to Bob Clemen who has written a nice piece about it in the Decision Analysis Newsletter, and to the SJDM mailing list, here’s the one question:
“Suppose you face a gamble where you can win $x with probability 0.5 or lose $x/2 with probability 0.5. What is the largest x for which you would be just willing to take this gamble? Iâm looking for the largest x that makes you just indifferent between taking the gamble or not.”
In Clemen’s book Making Hard Decisions, in the solutions manual, he gives a derivation of how to get from the respose to that question into an estimate of the risk tolerance parameter R in the exponential utility function U(x) = 1-exp(-x/R).
Another way to estimate risk tolerance is using the Distribution Builder
