ABSTRACT
Suppose you own a house worth $400, 000 which has a 1% chance of being damaged in a fire, bringing down the value of the house to $300, 000. How much might you be willing to pay to insure against this $100, 000 loss? These kinds of decisions involve risk, a situation where the uncertainty can be captured by objective probabilities, i.e., probabilities for which there is some statistical, experimental, or analytical basis that different people can agree upon. 1 We also want to know how decisions and outcomes differ when different people have different attitudes towards risk.
