Management 14th Edition by Leslie Rue,Lloyd Byars ,Nabil Ibrahim

Exercise 26

Risk Aversion
This exercise illustrates how different decision makers react differently to similar risks. Draw the following set of axes on a piece of paper:

Assume you are faced with a decision on whether to play or not to play a game of chance. You will play the game once and only once. If you win, you will get $2. If you lose, you will have to pay $1. Would you be willing to play if the probability of winning the game is 80 percent? How about 50 percent? 40 percent? 30 percent? Find the lowest probability of winning for which you would be willing to play the game for one time only. Put a dot above the $1 on the graph at the probability that you select. Repeat the process for each of the following games:
1. Connect the dots on your graph and compare the curves drawn by various individuals in the class.
2. Do you consider yourself to be a risk taker or a risk averter?
3. How do you think that your affinity for risk might affect your ability to be a good manager?