Certainty equivalent

Strawderman, Lesley and Schaefer, Lacey (2009). Certainty equivalent. In Michael W. Kattan and Mark E. Cowen (Ed.), Encyclopedia of medical decision making (pp. 124-126) Thousand Oaks, CA, United States: Sage Publications. doi:10.4135/9781412971980.n34

Author Strawderman, Lesley
Schaefer, Lacey
Title of chapter Certainty equivalent
Title of book Encyclopedia of medical decision making
Place of Publication Thousand Oaks, CA, United States
Publisher Sage Publications
Publication Year 2009
Sub-type Chapter in reference work, encyclopaedia, manual or handbook
DOI 10.4135/9781412971980.n34
Open Access Status
ISBN 9781412953726
Editor Michael W. Kattan
Mark E. Cowen
Start page 124
End page 126
Total pages 3
Language eng
Formatted Abstract/Summary
When examining the potential outcomes a given event may hold, a person is likely to approximate the probability of each possible result. Taken into consideration by the individual is the degree to which any of these outcomes may be certain. That is, although the benefit derived from an event with a lesser or unknown likelihood of occurring may be much greater, people often tend to opt for the less advantageous, although more certain, outcome. An influential variable, however, is to what degree the individual finds the certain outcome to be of value. Thus, certainty equivalents are the amount of utility, or usefulness, that a person will consider to forgo an offered gamble. When the person becomes indifferent between the choice of a certain event and a probabilistic one, the value of the certain event is called the certainty equivalent.

Certainty equivalents are used most frequently in an outward sense within the realm of economic ventures, though individuals may subconsciously use the framework for any scenario in which a gamble presents itself. The utility terms will therefore vary with the application as what is considered beneficial is highly circumstantial. Within medical decision making, however, certainty equivalents could include financial aspects relating to choices in care, various measures of quality of life for the self and for others, or potential recovery periods. The difference between the expected value of indefinite outcomes and the certainty equivalent is referred to as the risk premium. 
Q-Index Code BX
Q-Index Status Provisional Code
Institutional Status Unknown

Document type: Book Chapter
Collection: School of Social Science Publications
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Created: Thu, 14 Aug 2014, 12:55:52 EST by Lacey Schaefer on behalf of School of Social Science