{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# lec15 - Time and Uncertainty We don't know the future We...

This preview shows pages 1–3. Sign up to view the full content.

4 Time and Uncertainty • We don’t know the future. • We must make decisions whose outcome depends on unknown future events. • We can take actions that reduce or increase the uncertainty. 5 Two concepts: • Von Neumann-Morgenstern utility • Expectations over future events 7 Von Neumann-Morgenstern Utility Our well-being increases with our buying power (income, wealth, or net assets.) “Utility” is a function of buying power: y = income, wealth or net worth U(y) = utility from y 8 Utility Y Utility rises with y. 10 Utility Y Extra income has large effect when poor. Extra utility 12 Utility Y Extra income has smaller effect when rich. Extra utility

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
15 Expected Values over Uncertain Events Example: two possible futures Good luck gives Y G Bad luck gives Y B Expected income: EY = Prob(Good luck) * Y G + Prob(Bad luck) * Y B 16 Probability of good luck = 0.50 Y G = 100,000 Y B = 50,000 EY = 0.50 * 100,000 + 0.50 * 50,000 = 75,000 17 Probability of good luck = 0.80 Y G = 100,000
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

lec15 - Time and Uncertainty We don't know the future We...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online