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CHAPTER FIVE- UNCERTAINTY AND CONSUMER BEHAVIOR - Coggle Diagram
CHAPTER FIVE- UNCERTAINTY AND CONSUMER BEHAVIOR
describing risk
Probability
- how likely an outcome is
expected value
summary measure of something when there is uncertainty of the outcome
measures the central tendency
variability
- extent to which outcomes differ
standard deviation
flat distributions when all outcomes are likely
peaked distributions when some are more likely than others
Preferences towards risk
U=f(I)
utiltiy of a certain outcome is given by their expected utility
utility of uncertain outcome given by sum of utilities associated with all possible outcomes
risk averse
prefer certain outcome
prefer smaller variability of outcomes
highly risk averse
slightly risk averse
risk loving
prefer risky outcome
risk neutral
indifferent to risk
risk premium
- amount of money risk-averse person will pay to avoid risk
Reducing Risk
diversification
- reducing risk-allocating resources to a variety of activities-outcomes not closely related
negatively correlated variables
positively correlated variables
law of large numbers
sell large numbers -> relatively low risk
although single events may be random and largely unpredictable, the
average
outcome of many similar events can be
predicted
value of complete information
difference between E(V) when there is compelte info and E(V) when incomplete info
