Certainty Equivalent

The certainty equivalent is the guaranteed amount an individual considers equally desirable to a risky opportunity with potential higher rewards or losses. In other words, it’s the safe value someone accepts instead of taking a gamble with uncertain outcomes. For example, if a person is willing to accept $50 today rather than a 50/50 chance to win $100 or nothing, then $50 is their certainty equivalent for that gamble. It helps measure how much risk a person is willing to take and their preferences between certainty and risk.