For the payoff table below, the decision maker will use the following probabilities for the

state of nature:
P(s1) = 0.15, P(s2) = 0.5, and P(s3) = 0.35.
State of Nature
Decision Alternatives
s1 s2
d1 -5,000 1,000
d2 -15,000 -2,000

The decision maker expressed the following indifference probabilities.

Payoff Probability
40,000 0.00
10,000 0.85
1,000 0.60
-2,000 0.53
-5,000 0.50
-15,000 0.00

Make a decision using the Expected Utility Approach.

Expected Utility Approach

Payoff Table
State of Nature
Decision Alternatives
s1 s2
Probability 0.15 0.5
d1 (5,000.00) 1,000.00
d2 (15,000.00) (2,000.00)
g probabilities for the state of nature:

ture
s3
10,000
40,000

Risk Avoider

Utility Value

Monetary Indifference Utility

Values value of p Value
ture 40,000.00 0.00 10.00
s3 10,000.00 0.85 8.50
0.35 1,000.00 0.60 6.00
10,000.00 (2,000.00) 0.53 5.30
40,000.00 (5,000.00) 0.50 5.00
(15,000.00) 0.00 0.00
 Utility Table
Decision State of Nature
Alternatives s1 s2 s3 Expected
Probability 0.15 0.5 0.35 Utility Decision Approach
d1 5.00 6.00 8.50 6.73 d1
d2 - 5.30 10.00 6.15 Not Optimal
From the above calculation, d1 (specifically 10,000) would be chosen using the expected utility approach.