L06 Choice Under Uncertainty

L06 Choice Under Uncertainty - Choice Under Uncertainty...

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    Choice Under Uncertainty Evaluating Risk
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    Uncertainty Uncertainty exists for all decisions  where the future outcome cannot be  known. Value received from a purchase Return on an investment Income from a job over time The decisions involve risk
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    Risk and Uncertainty Risk  is defined as uncertainty that  matters to people Risk management  is the process of  formulating the benefit-cost trade-offs of  risk-reduction and deciding on a course  of action to take Portfolio theory  is the quantitative  analysis of those trade-offs to find an  optimal course of action.
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    Risk and Uncertainty Uncertainty-  there are many possible  outcomes the likelihood or probabilities  of each outcome is unknown Risk-  There is a given set of outcomes  the probability of each is known or can  be estimated  Risk is uncertainty quantified
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    Who Bears Risk? All risks are ultimately borne by people .  . . . . . . .  in their capacity as consumers,  stakeholders of firms and other  economic organizations, or as  taxpayers.
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    Speculators and Hedgers Speculators are investors who take  positions that increase  their exposure to  certain risks in the hope of increasing 
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L06 Choice Under Uncertainty - Choice Under Uncertainty...

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