Econ306 Chapter 5

# Econ306 Chapter 5 - Econ306 Chapter 5 Probability...

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Econ306 Chapter 5 Probability: likelihood that a given outcome will occur Frequency with which certain events tend to occur Subject probability is the perception that an outcome will occur Expected value: probability-weighted average of the payoffs associated with all possible outcomes; measures the payoff Payoff: value associated with a possible outcome Variability: extent to which the possible outcomes of an uncertain situation differ Deviation: difference between expected payoff and actual payoff Measure variability by calculating standard deviation: square root of the average of the squares of he deviations of the payoffs associated with each outcome from their expected values Expected utility: sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur Risk averse: condition of preferring a certain income to a risky income with the same expected value Risk averse is the most common attitude toward risk For a risk averse individual, losses count more (in terms of changes in utility) than gains Risk neutral: condition of being indifferent between a certain income and an

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## This note was uploaded on 11/16/2010 for the course ECON 306 taught by Professor Cramton during the Spring '06 term at Maryland.

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Econ306 Chapter 5 - Econ306 Chapter 5 Probability...

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