Wk2_Section_07 - Week 2 Section Notes EWMBA201A Rob Seamans...

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August 18, 2007 Week 2 Section Notes 1 Week 2 Section Notes EWMBA201A Rob Seamans
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August 18, 2007 Week 2 Section Notes 2 Administrative Stuff 1. Check out the class website frequently http://faculty.haas.berkeley.edu/wolfram/201a/index07.html 2. Read and prepare Freemark Abbey Wine case for next class. 3. No section next weekend.
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August 18, 2007 Week 2 Section Notes 3 What is a certainty equivalent? A certainty equivalent is the amount of money you’d need to be given with certainty to be indifferent between this certain payoff and taking a risky bet. It can’t be calculated (with the information given in this class); you have to be told what it is, or infer what it is based on other information given to you If CE<EV, a person is risk averse; if CE=EV, a person is risk neutral; if CE>EV, a person is risk loving In problem set or test questions, be careful that you are actually being given a CE, or that you can infer a range for the CE.
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August 18, 2007 Week 2 Section Notes 4 CE Examples Example 1: Georgia declines to take $5 and instead opts for a bet with an EV of $10. Is Georgia risk averse? Answer:
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Wk2_Section_07 - Week 2 Section Notes EWMBA201A Rob Seamans...

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