Practice question · Multiple choice
The expected value of a lottery ticket is negative, and millions are bought weekly. Is that irrational?
Hints
- Ask whether £10 million is worth exactly ten million times as much to you as £1.
- Expected value is a claim about money. What is the decision actually about?
Show the answer
A. Not necessarily, since expected value assumes money is valued linearly
Why
Expected value assumes linear utility, and money is not linear, the millionth pound is worth far less than the first, and a life-changing jump can outrank the arithmetic. Insurance is the same trade run in reverse, which is why buying both is not the contradiction it appears to be.
Practise Random Variables and Distributions
The app has 6 more questions on this lesson, and keeps your place in the course. Mathematics I is free to start.
More questions on Random Variables and Distributions
- Order the steps for computing the expected value of a discrete random variable.
- Complete the statement about a continuous random variable X.
- Select every statement that is true for all random variables X and Y.
- For a continuous random variable, P(X = 3) = 0 for every single value - yet X certainly takes SOME value. How…