Samenvatting - college Week 1-4, 6 & 7Intermediate Microeconomics Games and Behaviour (Universiteit Utrecht)Verspreiden niet toegestaan | Gedownload door Douwe Van Benschop ([email protected])lOMoARcPSD|669953
Intermediate microeconomics, games and behavior Lecture week –1 Uncertainty and time Micro : How do economic agents allocate scarce resources? They trade off (marginal) benefits against costs Before: The individual takes a decision, that leads to an outcome. Last year everything was certain. In this course there is uncertainty. The individual is not alone, it depends on what others do and there is competitiveness. The outcome is valued in a social context. Uncertainty and time •Theory –Expected Utility Theory –Risk attitudes •Application –Portfolio selection •Decision making over time •Anomalies –Prospect Theory 1. Risk and uncertainty Uncertainty: likelihood of outcomes unknown Risk: likelihood of outcomes known. Decision tree, in job 2 there is nature. It’s the sudo-play (?). There is a 50% chance that your income will be 10.000 or 30.000. As a decision maker you can choose between job 1 with a utility of 20.000. Job 2 has the same expected income, but it is uncertain. You can the two jobs through calculating the expected values. Expected utility, E[U(Y)] does consider the risk involved. The utility of the expected value U[E(Y)] does not consider the risk and expected utility does. Expected Utility Theory Von Neumann-Morgenstern: the first systematic investigation of preferences regarding risky incomes (lotteries) represented by the expected value of a payoff function over deterministic outcomes. The EUT is a theory that builds on individual preferences over risky outcomes Main assumption: Individual preferences over risky outcomes satisfy (completeness, transitivity, continuity, and independence). The expected value associated with an uncertain situation is a weighted average of the payoffs or values associated with all possible outcomes. We will measure payoffs in terms of utility rather than in dollars as we can apply the Verspreiden niet toegestaan | Gedownload door Douwe Van Benschop ([email protected])lOMoARcPSD|669953
principles not only to jobs but also to other choices. Rational decision making with uncertainty A decision maker facing a decision problem with a risky payoff U(Y) is rational if he chooses an action a* that maximizes his expected utility. That is a* is chosen if and only if E[U(Y)a*] > E(U(Y)a] Three different risk attitudes towards risk: - Risk neutral:E(U) = U[E(Y)]. The decision maker is indifferent between the job with the certain income and the job with the uncertain income given the same expected value. - Risk averse:E(U) < U[E(Y)] A loss of 10,000 to a certain income of 20,000 in utility termsoutweighs a gain of 10,000 compared to a certain income of 20,000.