Question: Company HHH decides to pursue investment in a new program. Notably, Hawaiian state law requires that any such investment receive the approval of a special legislative committee. The committee vote just occurred, and, right now, only the Governor of Hawaii, the committee, and a few key aids know whether the program was approved. Just prior to the committee’s vote, you believed there was a 65% chance that the Council would approve the program and a 35% chance that it wouldn’t. A colleague of yours wants to bet you $500 that the program was NOT approved. You can either refuse to bet or you can bet that the program was approved. (That is, you can’t bet that it was not approved.) Assume for (a) and (b) that you are risk neutral.

a) Before you decide whether to bet, you have the opportunity to make a quick call to a friend of yours, who happens to be a key aid to the Committee Chair and knows whether the program was approved. Would it be worth $150 to call him, assuming he’ll truthfully tell you the result? Be sure to show the decision tree – including all relevant branches – that fuels your reasoning.

b) For this part, assume you did not make the call described in (a). Another friend of yours is a good friend to an aid to the Committee Chair, and you suspect that maybe she also knows the result of the vote; you estimate there is a 60% chance she knows whether the project was approved. If she knows, she will truthfully tell you the result. What is the most you would pay to call her – if any amount at all - to ask for the result? Be sure to show the decision tree that fuels your reasoning.

c) Would your answer to (a) change if you were risk averse? If so, how? If not, why not? Be specific relative to the various branches of the tree you created in part (a).