lecture5 - !"#$%&"'()...

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*+,-&./$0-+ /+1 2+#"&$/0+$3
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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
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7 The expected value of a lottery is the weighted average of all possible outcomes where the weight is the probability of that outcome: 8>?@ A ! 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.
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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 $7 7 Expected value of the game is (3/4)*(2) + (1/4)*(-3) = 0.75 7 The expected value of the game is not zero. Therefore it is not a fair game.
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89:"#$"1 ;/<%" "9/.:<" G F0+1 $J" ? $J/$ ./W"6 $J06 / ,/0& =/."K
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89:"#$"1 ;/<%" /+1 V0<<0+=+"66 $- :</3 7 *, $J" "9:"#$"1 ;/<%" -, / <-$$"&3 06 :-60$0;"S G I-% :/3 MBSOOOSOOO G ZZ[ -, $J" $0." 3-% ="$ MO G B[ -, $J" $0." 3-% ="$ MBOOSOOOSOOO 7 \-%<1 3-% :</3X
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89:"#$"1 2$0<0$3 G $J"3 #/&" /]-%$ $J" %$0<0$3 $J/$ $J" 1-<
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lecture5 - !&quot;#$%&amp;&quot;'()...

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