CE CONCEPT DEFINITION
OPERATIONAL/EMPIRICAL
Consider a gamble G defined by a finite collection of possible
monetary payoffs (xi) with associated probabilities (pi):
G = {xi, pi}i=1...n
or defined by a probability density function f(x).
IF POSITIVE VALUED (i.e. preferred to status
quo):
-
What is the least amount of cash which you would accept in
lieu of the gamble G?
IF NEGATIVE VALUED (i.e. prefer status quo to gamble):
-
What is the maximum cash payment you would make in lieu of
taking the gamble G?
In the first case, CE = "Answer";
In the second case, CE = -"Answer"
THEORETICAL
If the decision maker's utility for money is a known function
U(.), the certain equivalent value for the gamble G is that monetary amount,
call it x~, such that the utility of the certain amount is equal to the expected utility of the gamble, that is:
