For a risk-averse person, the correct statement is:
b. the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
This reflects the concept of loss aversion, which suggests that individuals feel the negative impact of losses more strongly than the positive impact of equivalent gains.
Here's a brief overview of why the other options do not apply to a risk-averse individual:
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a. the utility function exhibits the property of constant marginal utility of wealth.
This is not true for risk-averse individuals; they typically experience diminishing marginal utility, meaning the additional utility gained from each extra dollar decreases as wealth increases. -
c. the utility function exhibits the property of increasing marginal utility of wealth.
This is incorrect for risk-averse individuals; such a person has diminishing marginal utility, meaning their utility function is concave. -
d. the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
This statement is also incorrect for risk-averse individuals, as they tend to weigh losses more heavily than equivalent gains.
Thus, option b accurately reflects the behavior of a risk-averse individual.
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