At choice one, she will have, well $5,000, which is here and her utility will be 80.

And that's the case no matter what.

Basically, there's nothing to worry about insurance, just that's just the case.

$5,000, boom, she's happy.

Now at choice two, things are a little different.

Choice two, she actually has an opportunity, to maybe make $9,000 or

$3,000, and it is actually something

that she's not quite sure which way it's going to go.

That's why we have this listed as a range of outcomes.

Now, to make this actually work,

in terms of why we have a utility of all scheduled weeks.

We don't know again, all the possible combinations and so,

to actually represent that notion with expected utility again,

we look at the average of all the outcomes that are possible.

And that's what this straight line represents from 65 to 95.

That shows us because of the wealth that she's able to earn,

what her full range of outcomes are going to be.

But the interesting thing is that, if you actually look then,

at that average line and you sort of see where things are.

It turns out the utility 80, and you drop it down to, and

it maps exactly to that point here, that average line.

Her wealth is equal to 6.

And one last piece you have to understand is that,

if her wealth's equal to 6, and she has to gamble to be able to get that money.

It turns out that she might not like that, and she might be figuring that gamble

means she might want to have to buy off the risk if you will, the cost of risk,

this gets to the concept of insurance.

And so, at the end of the day her expected utility from doing this choice is really,

even though she might have more money it's going to be 80.

And since she's really no better off because of this, she might say, yeah,

I'm not really indifferent.

I might just go with choice one, because I'm really going to be much better

off in terms of my utility, though my wealth might be actually higher.

So interesting concept but let me show you one other thing that we

hopefully will drive this idea further home.

So, this issue of risk aversion is a really again,

core concept to insurance, and everybody has their own sense of risk aversion.

Also, when we compare risk aversion back to, if you will,

a control population of risk neutrality.