MGEB02H3 Lecture Notes - Lecture 6: New York University Stern School Of Business, Risk Aversion, Utility
17 Oct 2018
School
Department
Course
Professor
Document Summary
Choice under uncertainty how do individuals make decisions when there is uncertainty about outcomes. Probability likelihood of a particular outcome. Variability extent to which possible outcomes of an uncertain event differ. Expected value probability-weighted average of the payoffs associated w/all possible outcomes: sum of every outcome, times its probability. Suppose there are 3 raffle tickets avail for a raffle w/a payout of ,000. Outcomes: probability 0. 25: gain 1,000,000, probability 0. 75: get zero. If we roll a dice and pay the # of dollars that your roll, what is the expected. Evaluating risk need to consider probability of each event and the variance dollar value: valuing risk: Suppose you were thinking about having an extra . Utility & risk our way to model aversion to risk is to imagine that dollars are less valued as they accumulate use utility function to describe this. Risk aversion preferring the less risky alternative, even when expected value is the same.
