A professional athlete is negotiating their next contract an…
A professional athlete is negotiating their next contract and deciding between two teams, Team A and Team B. Team A offers a guaranteed $1 million salary. Team B offers a performance-based contract: $4 million if they make the “All-Star” team, $250,000 otherwise. The athlete believes there is a 20% chance they will make the “All-star” team — a designation given to the best players in the league. We observe that the athlete signs with Team B. Based on this information, what can we infer about the athlete’s risk preference? (Assume the athletes only cares about salary and not other intangibles, like team quality.)