Risk and cost of capital introduce very strange twists on expected utility.
Assume that living has a greater expected utility to me than any monetary value. If I need a $20,000 operation within the next 3 hours to live, I have no other funding, and you make me offer 1, it is completely rational and unbiased to take option 1A. It is the difference between a 100% of living and a 97% chance of living.
If I have $1,000,000,000 in the bank and command of legal or otherwise armed forces, I may just have you killed—for I would not tolerate such frivolous philosophizing.
That’s beside the point. In the first case you’d take 1A in the first game, and 2A in the 2nd game(34% chance of living is better than 33%). In the 2nd case, if you bothered to play at all, you’d probably take 1B/2B. What doesn’t make sense is taking 1A and 2B. That policy is inconsistent no matter how you value different amounts of money (unless you don’t care about money at all in which case do whatever, the paradox is better illustrated with something you do care about) so things like risk, capital cost, diminishing returns etc are beside the point.
Risk and cost of capital introduce very strange twists on expected utility.
Assume that living has a greater expected utility to me than any monetary value. If I need a $20,000 operation within the next 3 hours to live, I have no other funding, and you make me offer 1, it is completely rational and unbiased to take option 1A. It is the difference between a 100% of living and a 97% chance of living.
If I have $1,000,000,000 in the bank and command of legal or otherwise armed forces, I may just have you killed—for I would not tolerate such frivolous philosophizing.
That’s beside the point. In the first case you’d take 1A in the first game, and 2A in the 2nd game(34% chance of living is better than 33%). In the 2nd case, if you bothered to play at all, you’d probably take 1B/2B. What doesn’t make sense is taking 1A and 2B. That policy is inconsistent no matter how you value different amounts of money (unless you don’t care about money at all in which case do whatever, the paradox is better illustrated with something you do care about) so things like risk, capital cost, diminishing returns etc are beside the point.