MATH 573 Study Guide - Final Guide: Moral Hazard, Insurance Fraud, Fire Hydrant
Document Summary
Regarding events which could produce a loss. Can be losses for firms and/or individuals (you) A loss which is certain has 100% chance - certain. Impossible loss has 0% chance of happening - certain. No uncertainty - budget, plan, and avoid the loss situation. The loss is still present; no uncertainty about the loss. Risk does not equal the probability of the loss. Speculative risk 3 future states of the world (gain, loss or no gain and no loss) Ex of speculative risk: gambling, buying stock, buying a home. Pure risk 2 future states of the world ( loss or no loss) Arises out of changing circumstances or new laws. Subjective vs objective an individual"s view of uncertainty: subjective risk. Not easily measured or compared among individuals risk lovers or takers, risk averse, risk neutral influences how firms or key decision makers handle risky situations. Ex: traveling on airplanes, swimming in the sea etc: objective risk.
