Investment behavior under traditional lance Suppose that your original wealth is 100000, you have a bet of 50,000, with 50% probability winning and 50% probability losing Expected utility E(U)=0.5×U(5000.5×U(150000 Expected wealth E(W)=0.5×[50,000+150,00010000 If investor are risk averse E(U(W<U(E)Investment behavior under traditional finance • Suppose that your original wealth is 100000, you have a bet of 50,000, with 50% probability winning and 50% probability losing. • Expected utility • Expected wealth • If investor are risk averse • E ( U ( W )) = 0.5 × U (50,000 ) + 0.5 × U (150,000 ) E ( W ) = 0.5 × [50,000 +150,000 ] =100000 E ( U ( W )) < U ( E ( W ))