Comparing a lottery where a $1 ticket purchases a chance to win $1 million with another lottery in which a $5,000 ticket purchases a chance to win $5 billion, we notice many people would participate in the first but not the second, even though the odds of winning both lotteries are the same. We can perhaps best explain this outcome by:
A) higher expected value for the lottery paying $1 million.
B) higher expected value for the lottery paying $5 billion.
C) lower value at risk for the lottery paying $1 million.
D) higher value at risk for the lottery paying $1 million.

Question

Quizplus · Accepted Answer

The reason people are more likely to participate in the lottery where a $1 ticket purchases a chance to win $1 million rather than the lottery where a $5,000 ticket purchases a chance to win $5 billion is that the value at risk is lower in the former. People are generally risk-averse and prefer to limit their potential losses, even if the potential gains are the same. Therefore, the lower "value at risk" of the $1 million lottery makes it more appealing to most people.

Comparing a Lottery Where a $1 Ticket Purchases a Chance