Aniko Oery
University of California, Berkeley
Section 4: Decision under uncertainty
Econ 100A, MICROECONOMIC ANALYSIS, Spring 2010
Before we continue with the analysis of decision making in the case of two goods, we will analyze
preferences of decision makers under risk. Since the consideration of risk makes our models more
complicated, we focus on situations where people only care about one good, namely money. Hence,
we restrict ourselves to univariate utility functions.
1
Lotteries
A lottery
X
is defined by monetary payoffs and probabilities with which each payoff occurs. In
mathematics lotteries are also called random variables. One can represent the distribution of a
random variable or lottery graphically using a histogram as you have seen in lecture.
Example:
X
=
$

10
with probability 0
.
5
$0
with probability 0
.
2
$20
with probability 0
.
3
Would you play this lottery with me?
2
vonNeumannMorgenstern utility functions
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 Spring '08
 Woroch
 Utility, Convex function, Jensen's inequality, Aniko Oery

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