Imagine there is a jar that contains either 1, 2, or 3 tickets. Each ticket has an amount of money that represents the amount to win or lose. The tickets are mixed and one is chosen randomly, and you win or lose the amount printed on the ticket drawn. Each ticket has an equal chance to be drawn. For example, if there is only one ticket, to win $100, then it is a sure thing to win $100. If there are two tickets, to win $50 or lose $50, then you have an equal chance to either WIN or LOSE $50. If there are three tickets, each ticket has a 1/3 chance to be the outcome of the gamble.
In this study, we want you to judge a BUYING PRICE for each gamble.
For gambles you WANT to play, think of the highest price you would be WILLING TO PAY for the opportunity to play the gamble for real and win one of the prizes of the gamble. That is, you will pay an amount of money and you get to receive the prize of the gamble or suffer the loss, depending on what ticket is drawn from the jar.
In example 1 below, the jar contains exactly two tickets: 1 Ticket says BREAK EVEN: $0, and one ticket is to WIN the Amount of $100. Since each ticket is equally likely, this is a 50-50 chance to WIN $100 or to BREAK EVEN. What is the most you would pay to play this gamble one time? The worst you can do is to BREAK EVEN, so you should be willing to pay something for the chance to win $100. You have a 50% chance to WIN $100 and 50% chance to win nothing. Type your judgment of the HIGHEST price you are willing to pay to BUY an opportunity to play the gamble. DON'T TYPE the "$" SIGN in the box. Just type a number in the box, representing the highest price in dollars you would be willing to pay. Example 1. 1 Ticket to Break Even: $0 1 Ticket to WIN Amount: $100
For gambles you DO NOT WANT to play, think of the highest price you would pay to AVOID having to play the gamble. This is like BUYING INSURANCE. When you buy insurance, you are paying the insurance company to remove the gamble from you. For example, if you are worried that someone might steal your car, you can buy insurance so that in case someone steals it, you do not have to pay the cost to replace it. The idea of buying insurance is paying to AVOID a gamble that life presents to you.
Example 2 asks, what is the most you would pay to AVOID having to play a 50-50 gamble to either BREAK EVEN $0 or LOSE $100. You should be willing to pay something because if you don't buy insurance, you have a 50% chance to LOSE $100. Type the amount you would be willing to pay to AVOID this gamble in the box, using a MINUS SIGN to show you DO NOT want to play the gamble. DO NOT type in the dollar sign. How much would you be willing to pay to buy insurance and AVOID it? TYPE A MINUS SIGN and then the amount you would pay to buy insurance against this gamble. DON'T TYPE a "$" Dollar Sign. Example 2. 1 Ticket to Break Even: $0 1 Ticket to LOSE Amount: -$100
IMPORTANT: The minus sign tells us if you want AVOID the gamble instead of PLAY the gamble.
You typed a MINUS sign in Example 2 because you DO NOT WANT to play the gamble, and you are BUYING INSURANCE to take the gamble away. It is VERY IMPORTANT that you put in a minus sign for gambles you do not want to play, so we can learn which gambles you do or do not want to play. It is also important you assign a value to each gamble, so we know how much you do or do not want to play it.
In both cases, whether you want to play or to avoid, you are buying CONTROL over the gamble. You are buying the right to play it or to avoid it. When you want to play the gamble, just type in the highest amount you would pay to play it. When you DO NOT want to play the gamble, type in a MINUS sign and the highest amount you would pay to AVOID the gamble.
In this study, some gambles have a chance to WIN and a chance to LOSE. Example 3 is a fifty-fifty gamble to WIN $100 or LOSE $20. Example 3. 1 Ticket to WIN Amount: $100 1 Ticket to LOSE Amount: -$20
Use negative numbers for gambles you do not want to play, use 0 if you don't care one way or the other, and positive values for gambles you want to play. In Example 4, you have equal chances to BREAK EVEN, to WIN $60 or to LOSE $40. Example 4. 1 Ticket to Break Even: $0 1 Ticket to WIN Amount: $60 1 Ticket to LOSE Amount: -$40
Some gambles are "sure things" to either win or lose. In Example 5, there is only one ticket, to LOSE $100. How much would you pay to AVOID having to LOSE $100? Type a minus sign in the box. Would you pay -$80? Yes, you would because otherwise you MUST pay $100, right? So, you should be willing to pay any amount less than $100 to AVOID having to pay $100. Example 5. 1 Ticket to LOSE Amount: -$100
REMINDERS: Do NOT TYPE the $ dollar sign in the box. Do not type in a plus sign for gambles you want to play, just type the amount. For gambles you do NOT want to play, type a minus sign AND the Amount indicating the most you would be willing to pay to AVOID playing the gamble.
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