COMM 295 Lecture Notes - Lecture 14: Standard Deviation, Expected Utility Hypothesis, Risk Premium
Document Summary
A person is risk neutral if she shows no preference between a certain income, and an uncertain income with the same e(x): a risk neutral person has a constant marginal utility of income. (straight line utility curve, a risk neutral person chooses the option with the highest expected value, because maximizing expected value maximizes utility, risk premium is 0 for risk neutral person cuz they choose the risker option if it has a slightly higher e(x) If two investments are independent they are uncorrelated. People often have mistaken beliefs about the probability that an event will occur: many individuals make choices under uncertainty that are inconsistent with the predictions of expected utility theory. independent outcomes, the gambler"s fallacy: false belief that past events affect current, overconfidence (overestimate their probability of winning, framing effect: many people reverse their choices when a problem is framed, reflection effect: attitudes toward risk are reversed (reflected) for gains versus losses.
