certainty equivalent

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Certainty equivalent

An amount that would be accepted today (risk free) in lieu of a chance to receive a possibly higher, but uncertain, amount.

Certainty Equivalent

A small, zero-risk return an investor may trade for a larger potential return with an associated risk. Companies offer certainty equivalent returns on certain investments and use their demand to determine the level of risk an investor will accept for a given return from the company.

certainty equivalent

The minimum sum of money a person would accept to forgo the opportunity to participate in an event for which the outcome, and therefore his or her receipt of a reward, is uncertain. For example, suppose you are told to draw one card from a full deck of cards. If you draw a red card you win $100 and if you draw a black card you win nothing. If you would accept $40 to forgo the selection and possibility of winning, $40 is the certainty equivalent of the outcome of the event. Certainty equivalents are used in evaluating risk.

certainty equivalent

see DECISION TREE.
References in periodicals archive ?
He expounded the first axiomatic bases of the expected utility hypothesis based on moral propositions where full belief is represented by a probability of 1, the opposite probability being 0, and equal belief in the two is represented by the probability of .
Experiments revealed other causes of violation of the expected utility hypothesis beside the common effect cited above.
It involves the construction of two types of indifference curves, one for the expected utility hypothesis and one for the mathematical expectation hypothesis, and to show that the latter is steeper than the former.
We environmental economists should begin to reassess our marriage to the probabilistic structure of the expected utility hypothesis.
For completeness, note that the expected utility hypothesis and linearity in probabilities are two equivalent terms as von Neumann and Morgenstern showed that preferences can be represented by a linear function (in the probabilities) only if complete ordering, continuity, and the independence axiom hold.
The expected utility hypothesis is an important and testable criterion that administrators should satisfy.