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 ?
This has implications for the policyholder's expected utility or certainty equivalent (see also the illustration in Figure 4).
The first part of the cyclist's certainty equivalent has not changed.
To show how the certainty equivalent differs depending on whether there is demand information or not, the following equation is derived by Eqs.
Prior to the terminal set of nodes, the hedge fund value is the maximum of immediate exercise of the redemption option and the certainty equivalent.
To examine the efficacy of this measure, we regressed the partners' responses to the Client Retention Judgment Scale on the dollar amounts each partner provided as the amount they would be willing to settle in the Certainty Effect-Variable Certainty Equivalent litigation scenario.
For instance, an individual with a log utility function would have demanded a certainty equivalent of $79.
11) The domain additivity of the utility function translates into a certainty equivalent that is additively separable.
It incorporates the effect of a deficit financed tax cut on agent's saving via its effect on his certainty equivalent income Q.
If the buyer's holding period for purposes of computing the uncertain appreciation in the art work is future time t, he will offer a price at time 0 that will maximize the net certainty equivalent of his investment return.
For any x in [min, max] and any F in D[min, max], x is the certainty equivalent of F if and only if V(F) = V([G.