Hi, I’m confused with Behavioral Finace - reading 7 example on page 27(CFAI book 2). In the example, it basically says:
Situation 1: 50% probability of winning 150 and 50% probablity of losing 100
Situation 2: 100% of losing $100 with certainty and gamble with 50% probability of winning $50, and 50% probablity of losing $200
The examplaination gives 2 fomulas:
Formula 1 is $25 = E(gain of gamble)-E(certainty), which is $25-$0=$25.
Formula 2 is $25 = E(gain of gamble)-E(certainty), which is -$75-(-$100)=$25
I think i understand formula 1, but I don’t get formula 2, how does this make sense? if you already knew you were losing $100 already, then you went gambling and your chance is to lose another $75 dollars, doesn’t that make your loss to be $175 overall? Can someone please explain it to me? am i understanding the concept wrong?