Exponential utility has an adjustable parameter called risk tolerance. The risk tolerance parameter measures:
A) how much money the decision maker has to spend
B) the decision maker's attitude toward risk
C) how much risk there is in a given decision
D) the probability of an unfavorable outcome
E) none of these choices

Question

Quizplus · Accepted Answer

The risk tolerance parameter in exponential utility measures the decision maker's attitude toward risk. It reflects their willingness to take on risk and how much they are willing to sacrifice for a higher return. It is not related to how much money they have to spend, the amount of risk in a decision, or the probability of an unfavorable outcome.

Exponential Utility Has an Adjustable Parameter Called Risk Tolerance