Please enable JavaScript.
Coggle requires JavaScript to display documents.
Choice Under Uncertainty - Coggle Diagram
Choice Under Uncertainty
Risk & probability
Risk
Many outcomes possible
Variance
Always positive
measure absolute risk
Higher = thicker tail
Lower variance = better
Risk Attitudes
Expected Utility Theory
willingness to accept risk
Risky decisions to maximize utility
Different attitudes
Risk Averse
Diminishing MU profit
Increase @ decreasing rate
Risk loving
Increasing MU profit
Risk Neutral
Constant MU profit
Risk Premium
income given up between risk and no risk
LOADING FEE: value of expected loss
Fair premium
Insurance prem = difference between Res. and fair premium = loading fee
reduce risk w/ Insurance
Risk pooling- Independent of one another
insurance market
Reservation Ins. premium
Risk averse Individual
Standard deviation
Probability
Objective: percentage outcome may occur
Subjective: belief that outcome may occur
Expected Value of probability distribution
Not actual, AVERAGE If risky decision repeated
Behavioral economics
Common Consumer Mistakes
Ignore nonmonetary cost
Endowment effect
Fail to Ignore sunk cost
Unrealistic about future behavior