Description
Return a supplied certainty equivalent's risk premium.
Decision models distinguish monetary payoffs, probabilities, model values and subjective equivalents. Discounting, probability weighting and reference-dependent utility terms depend on supplied parameters and cannot by themselves establish actual preferences or an appropriate allocation.
Return a supplied certainty equivalent's risk premium.
When to use this tool
Use Certainty Equivalent Risk Premium Gap when evaluating the stated decision-model, lottery or discount contribution.
How to use the tool and how it works
- Enter outcomes, probabilities, certaintyEquivalent. Follow any array-alignment requirements below. Use the units and conventions below.
- Run the tool. Correct any format, range, or cross-field input error before interpreting the output.
- Read expectedValue, riskPremium. Use the output convention below.
Return a supplied certainty equivalent's risk premium. Require aligned outcomes/probabilities in [0,1] with total within 1e-12 of one; expectedValue is their dot product, riskPremium = expected-certaintyEquivalent.1
| Input field | Meaning and units | Accepted input |
|---|---|---|
| outcomes | Outcomes | Required. Array of finite number; maximum items 256. |
| probabilities | Probabilities | Required. Array of finite number; maximum items 256. |
| certaintyEquivalent | Certainty Equivalent | Required. Finite number. |
| Output field | Interpretation | Returned shape |
|---|---|---|
| expectedValue | Expected Value | Required. Finite number. |
| riskPremium | Risk Premium | Required. Finite number. |
{
"input": {
"outcomes": [
0,
100
],
"probabilities": [
0.5,
0.5
],
"certaintyEquivalent": 40
},
"output": {
"expectedValue": 50,
"riskPremium": 10
}
}Limitations and assumptions
- A negative premium is allowed; no utility fit, certainty-equivalent elicitation or recommended investment is provided.
- Inputs must satisfy both the field types and the cross-field conditions above. Invalid input causes an error; a successful false flag or documented placeholder is a different result.
- Numeric calculations use binary floating point unless exact decimal-integer arithmetic is explicitly stated. No hidden measurement tolerance or decimal rounding is added; nonfinite or out-of-contract results are rejected. Numeric signed-zero results are exported as zero.
Alternative or Complementary methods
Fit and validate an appropriate complete decision model against relevant observations; distinguish model scores from money and assess actual financial choices separately.
References
Similar or alternative tools
- Lottery Sure Equivalent Gap
Return expected lottery payoff and sure-equivalent gap.
- Lottery Null Branch Mass
Return probability mass of supplied null and nonnull branches.