According to a new report from the United Nations’ Intergovernmental Panel on Climate Change, hurricanes are becoming stronger, rainfalls are heavier and flood risk is higher. Living in an area that is somewhat close to the coast, you consider purchasing flood insurance for your home for this year. In your area, the cost of flood insurance is $772. If you are hit by a major flood, your anticipated costs for repair is $200,000. A minor flood in your area will result in an estimated repair cost of $30,000. If you choose to purchase flood insurance, it will cover the cost of damage up to $180,000.
a. Develop a payoff table for this situation. What decision should you make using each strategy?
i. Aggressive (Optimistic) ii. Conservative (Pessimistic) iii. Opportunity Loss
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