Solving for the Risk Premium From a Utility Function

[@nadhirahghafar1286]

no way this video just simplify my 2 hour lectures in a better explanation im gonna cry

[@EconomicsinManyLessons]

That's great to hear!

[@sankariadak2677]

So so helpful... I felt like crying when you said I hope you find this video helpful.. Thank you so much

[@Orange1117]

Awesome video. I had been looing for this, such a concise explanation.

[@amandaz1454]

Wow can't believe my prof managed to expand a 3 minutes video content to a 3 hours lecture

[@michaeleddy927]

So many Helpful Videos! Thank you so much!

[@mksv7663]

Awesome video! Nicely explained.

[@AydanIbragimli]

Hi. I have a question. Let's say, John has 50 % probability to earn 20 000 and 50 % loosing 10 000. If utility function is 2W, then what is risk premium? If we have loses, we also calculate risk premium in the same way?

[@NikilasHeige]

Thank you for this explanation! So helpful!!

[@bostonswift]

Why did you raise the power to square instead of 1/2?

[@rickr2885]

the power of 1/2 is the same thing as square root and he is wanting to cancel that out so thats why he squares both sides

[@bostonswift]

Thanks for that, it makes sense.

[@superjoppie2001]

Good fucking shit, thanks a lot

[@jamesvx5038]

saved my ass

[@sakshigupta5809]

Two players have the opportunity to participate in a gamble with two possible outcomes as: Outcome 10 30 Probability 0.3 0.7 The player's utility functions for the money outcomes are as follows: Player 1: U₁(M) = √M +6 Player 2: U₂(M) = (M +5)^2 Determine the difference in the amounts that you must offer to these two players. Please solve this .

[@matthewbonnell5375]

You'd have to pay player 1 $1.16 to take the gamble (their risk premium) because they are risk averse, but because player 2 is risk-seeking, they would pay $5.5 to make the gamble (a negative risk premium). Follow the same steps in this video to arrive at the solution (risk premium = expected value of gamble - certainty equivalent) Find certainty equivalent where expected utility from gamble = person's utility function (and isolate using algebra)