Risk Attitudes - EV is negative risk-neutral risk-averse...

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Overview of Risk Attitudes The table below shows the decision which each type of individual would make, if they were confronted with an opportunity to voluntarily enter into a financial investment with the various possibilities regarding the expected values (EV’s). In this context, the EV’s can be thought of as net investment returns from investing. For example, the “EV is positive” situation could be where the investment has a cost of $1,000, and the total amount expected to be returned to the investor is $1,250. That is, the “EV is positive” refers to a situation where the expected return is positive. Each investment involves some symmetric risk, i.e. there is some positive and negative variation around the EV’s. EV is positive EV is zero
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Unformatted text preview: EV is negative risk-neutral risk-averse risk-loving In a situation of risk, fair insurance is defined as a situation where the insurance premium is equal to the expected payment from the insurance company. More-than-fair insurance is defined as a situation where the insurance premium is less than the expected payment from the insurance company. For example, the expected payment from the insurance company might be $500, and the insurance policy costs $400. Less-than-fair insurance is defined as a situation where the insurance premium is more than the expected payment from the insurance company. Which types of insurance might different individuals purchase? More-than-fair Fair Less-than-fair risk-neutral risk-averse risk-loving...
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This note was uploaded on 07/14/2010 for the course UGBA 18195 taught by Professor Johngonzales during the Summer '10 term at University of California, Berkeley.

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