Applying Analytics

202 Applying Analytics: A Practical Introduction

exp ected utility of the guaranteed payoff. Therefore, to maximize your utility,

you should choose to flip the coin.

The key to the previous example was the assumption that the ratios of

the utilities matched the ratios of the payoff amounts, i.e., that the utility

function mapped linearly from payoffs to utility. In the more general case,

the ratio of the utilities is subjective in that it is dependent on the decis ion

maker’s preferences and sometimes those preferences can be counterintuitive.

For example, let’s say I have a choice between a guaranteed $100 million and

a coin flip with prizes of $300 million ...