Lecture 14 - Pschology and Risk

Lecture 14 - Pschology and Risk - Are Normative Models...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Are Normative Models Predictive? Are Individuals: Maximize Expected Utility Maximize ΣtE(U(Wealtht)) Maximize (1 + r)t (1 When wealth is uncertain (e.g. individuals face a When possible loss) individuals maximize the expected value of utility EU(W) = p1U(W1) + p2U(W2) + …. + PnU(Wn) EU(W) Question 1 Question 1 Rank the following causes of death in terms of Rank the amount of money that you prefer the government pay in order to save 100 people from this death: from Automobile accidents Heart disease Cancer Emotions in Risk Rating Emotions “Dread” reaction Unfamiliar risks judged as worse than familiar Unfamiliar risks risks “Catastrophe” reaction Events leading to large number of deaths at Events once judged as worse than many single deaths once “Involuntariness” reaction Risks imposed by others judged as worse than Risks those taken voluntarily those Question 2 Question 2 Is it safer to fly or to drive? Uses of Probability Uses Individuals tend not to be adept at calculating Individuals probabilities or expected values probabilities Individuals tend to exhibit certain biases in the Individuals estimation of probabilities estimation Low Probability Events May behave as if a small probability is actually 0 May behave as if a small probability is much larger Question 3 Question 3 Given that about 50,000 people die from motor vehicle accidents Given in the United States every year, estimate the following numbers of deaths per year in the United States from each of the following causes: causes: Tornadoes Tornadoes Murder Murder Asthma Asthma Heart disease Heart Diabetes Diabetes Food poisoning Food Pregnancy/child-birth/abortion Pregnancy/child-birth/abortion Perceptions of Probabilities Perceptions Optimism Bias Tendency to underestimate the probability of a bad event Tendency happening to oneself oneself Availability Bias Availability Tendency to estimate a higher probability of occurrence for Tendency well-publicized events well-publicized Increased estimate of likelihood just after event occurs Ignore Low Probability Events Tendency to behave as if a small probability is actually 0 Perceptions of Probabilities Perceptions Optimism Bias Tendency to underestimate the probability of a bad event Tendency happening to oneself oneself Availability Bias Availability Tendency to estimate a higher probability of occurrence for Tendency well-publicized events well-publicized Increased estimate of likelihood just after event occurs Ignore Low Probability Events Tendency to behave as if a small probability is actually 0 Question 4 Question 4 You are in Europe and bought a framed photograph there for You $200. The photograph is too heavy to carry home. A local shipping company will ship the photograph to your home in the U.S. the You can buy insurance that will compensate you ($200) if the You photograph is lost or damaged in shipping. The insurance will not change the chance that the photograph is lost or damaged. not While the photograph is worth only $200 in the market, you While fell in love with it at first sight because it shows the scene of your most romantic evening on the trip. You would be heartbroken if it were lost or damaged. What is the most you would pay for the shipping insurance? Decision Rules Decision Individuals do not consistently base decisions on Individuals expected values expected Question 5 Question Under a new environmental policy there is a Under 90% chance of reducing lost lives by 100 and a 10% chance of increasing lost lives by 200. 10% Should the policy be enacted? Question 6 Question Under a new environmental policy there is a Under 70% chance of reducing lost lives by 100 and a 30% chance of no change in lost lives. 30% Should the policy be enacted? Gains vs Losses and the “Precautionary Principle” Principle” Under a new environmental policy there is a 90% Under chance of reducing lost lives by 100 and a 10% chance of increasing lost lives by 200. chance E(gain) = .9(100) + .1(-200) = 90 – 20 = 70 Under a new environmental policy there is a 70% Under chance of reducing lost lives by 100 and a 30% chance of no change in lost lives. chance E(gain) = .7(100) + .3(0) = 70 Framing Effects Framing Perceptions depend upon the framing of an Perceptions event. event. Gains versus losses Change versus status quo Status Quo Bias Status Policy 1: By default, drivers may recover tort liability damages from By other drivers who injure them. May choose to give up that give right for a $200 reduction in insurance premiums. reduction Policy 2: By default, drivers do not have the right to recover tort By liability damages from other drivers who injure them. May choose to obtain that right for a $200 increase in insurance obtain increase premiums. premiums. The proportion of drivers choosing each policy depends on the The default choice: 80% choose the default default Question 7 Question 7 Rank the three warning messages below in terms of the Rank seriousness of the risk (e.g. number of people out of 1,000 who would die): would A.WARNING: This product contains a chemical known to the A.WARNING: state of New York to cause cancer. state B. Use of this product may be hazardous to your health. This B. product contains a chemical that has been determined to cause cancer in laboratory animals. cancer C. WARNING: The state of New York has determined that this C. product causes lung cancer, heart disease and emphysema. product Language and Communication Language These are examples of actual, alternative These labels for cigarettes labels Each of the labels is intended to convey an Each identical risk level identical Risk of lung-cancer death for smokers 1.4 per 1,000 (males) 0.6 per 1,000 (females) ...
View Full Document

Ask a homework question - tutors are online