lecture5

# lecture5 - #\$/\$0 1'2&\$/0 \$3 4"3'5.6'0#\$ 7 7 7 7 7 7...

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7 Expected value 7 Fair game 7 Expected utility 7 Certainty equivalent 7 Utility of the expected value 7 Attitudes towards risk 7 Risk neutral 7 Risk averse 7 Risk inclined 7 Insurance 7 Risk pooling
7 The expected value of a lottery is the weighted average of all possible outcomes where the weight is the probability of that outcome: ! B ? B C ! D ? D C E C ! + ? + 7 A lottery is defined as a fair game if E(X) = 0

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7 Individual invests \$10 G 75% of time “wins” and gets \$11 G 25% of time “loses” and gets \$7 7 Expected value of the game is (3/4)*(1) + (1/4)*(-3) = 0 7 The expected value of the game is zero. Therefore it is a fair game.
89/.:<" D) H-10,0"1 =/." 7 Individual invests \$10 G 75% of time “wins” and gets \$12 G 25% of time “loses” and gets \$7 7 Expected value of the game is (3/4)*(2) + (1/4)*(-3) = 0.75 7 The expected value of the game is not zero. Therefore it is not a fair game.

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lecture5 - #\$/\$0 1'2&\$/0 \$3 4"3'5.6'0#\$ 7 7 7 7 7 7...

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