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 ?
The works of Ramsey (1960), von Neumann and Morgenstern (1944) (NM), and Savage (1954) continue the axiomatization of the Bernoulli expected utility hypothesis, while alternating between their consideration of risk and uncertainty.
Analysts frequently use the simplex method to demonstrate violations of the expected utility hypothesis. Here we illustrate the common effects and the fanning-out process.
When there is no probability distortion represented by [theta], then the model reverts back to the expected utility hypothesis. This extended formulation allows a variety of utility models (Sigum, 2003, op.
We environmental economists should begin to reassess our marriage to the probabilistic structure of the expected utility hypothesis. The literature on choice under pure-uncertainty shows that the ability to formulate the outcomes in terms of probabilities is not a necessary condition for rationality.
We do not assume that preferences satisfy the expected utility hypothesis. In other words, we do not assume that preferences are linear and satisfy the independence axiom.
It is well-known that the expected utility hypothesis is testable in the sense that violations of it can occur empirically.