The expected value of a lottery is:
A)the average payoff you would get from the lottery if the lottery were repeated many times.
B)the sum of the probability-weighted squared deviations of the possible outcomes of the lottery.
C)a measure of risk preference.
D)the amount an individual would be willing to pay to enter a lottery.

Question

Quizplus · Accepted Answer

The expected value of a lottery is the average payoff that a participant can expect to receive over the long run, in case he or she plays the same lottery multiple times. It is calculated by taking the sum of the probability of each potential outcome multiplied by the payoff associated with that outcome. Therefore, option A is correct as it defines the expected value of a lottery accurately. Option B is not correct as it describes the formula of variance, not expected value. Option C is wrong as expected value is not a measure of risk preference but rather a measure of potential outcome. Option D is not accurate as the expected value is the payoff you can expect to receive on average, not the amount you are willing to pay. The expected value of a lottery is the average payoff you would get if the lottery were repeated many times. It is calculated by multiplying each possible outcome by its probability of occurring and then summing all of these products. This value represents the theoretical, long-term average payoff of the lottery.

The Expected Value of a Lottery Is