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penn101_09s9 - Expected Utility Theory Elementary Risk...

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Unformatted text preview: Expected Utility Theory Elementary Risk Management Econ 101: Intermediate Microeconomics Risk Management Jing Li Department of Economics University of Pennsylvania April 14, 2009 Jing Li Intermediate Microeconomics Expected Utility Theory Elementary Risk Management A Brief Review of Probability Theory Expected Utility Uncertainty, probability and random variable Uncertainty: there are multiple possible scenarios. Describing uncertainty: A finite set S = { s 1 , ··· , s n } : the state space; A state s ∈ S : a particular scenario where all things are determined. A probability distribution p : S → [ , 1 ] such that: ≤ p ( s ) ≤ 1 and ∑ s ∈ S p ( s ) = 1. A random variable describes what happens in each state: A function v : S → R ; v ( s ) : the consequence in state s ; A constant random variable embeds no uncertainty. Jing Li Intermediate Microeconomics Expected Utility Theory Elementary Risk Management A Brief Review of Probability Theory Expected Utility Uncertainty, probability and random variable Uncertainty: there are multiple possible scenarios. Describing uncertainty: A finite set S = { s 1 , ··· , s n } : the state space; A state s ∈ S : a particular scenario where all things are determined. A probability distribution p : S → [ , 1 ] such that: ≤ p ( s ) ≤ 1 and ∑ s ∈ S p ( s ) = 1. A random variable describes what happens in each state: A function v : S → R ; v ( s ) : the consequence in state s ; A constant random variable embeds no uncertainty. Jing Li Intermediate Microeconomics Expected Utility Theory Elementary Risk Management A Brief Review of Probability Theory Expected Utility Uncertainty, probability and random variable Uncertainty: there are multiple possible scenarios. Describing uncertainty: A finite set S = { s 1 , ··· , s n } : the state space; A state s ∈ S : a particular scenario where all things are determined. A probability distribution p : S → [ , 1 ] such that: ≤ p ( s ) ≤ 1 and ∑ s ∈ S p ( s ) = 1. A random variable describes what happens in each state: A function v : S → R ; v ( s ) : the consequence in state s ; A constant random variable embeds no uncertainty. Jing Li Intermediate Microeconomics Expected Utility Theory Elementary Risk Management A Brief Review of Probability Theory Expected Utility Uncertainty, probability and random variable Uncertainty: there are multiple possible scenarios. Describing uncertainty: A finite set S = { s 1 , ··· , s n } : the state space; A state s ∈ S : a particular scenario where all things are determined. A probability distribution p : S → [ , 1 ] such that: ≤ p ( s ) ≤ 1 and ∑ s ∈ S p ( s ) = 1. A random variable describes what happens in each state: A function v : S → R ; v ( s ) : the consequence in state s ; A constant random variable embeds no uncertainty....
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penn101_09s9 - Expected Utility Theory Elementary Risk...

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