Fitch%20-%20Class4%20F10-%20Risk

Fitch%20-%20Class4%20F10-%20Risk - Chapter 5 Uncertainty...

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er Behavior Fall 2010 UGBA101A-03 Microeconomic Analysis for Chapter 5 Uncertainty and Consume Slide 1 Business Decisions Class 4 Prof. Todd Fitch
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er Behavior CHAPTER 5: Uncertainty and consumer behavior Agenda What is risk? How can we measure it? Chapter 5 Uncertainty and Consume Slide 2 How can we reduce it? Attitudes towards risk
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er Behavior Uncertainty and Consumer Behavior 1. Heads you get U$S 3 and tails you get nothing 2. Heads you get U$S 2 and tails you get U$S 1 Which of these lotteries would you choose? How much are you willing to pay to participate in the first one? How about the second one? Chapter 5 Uncertainty and Consume Slide 3
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er Behavior Uncertainty and Consumer Behavior 1. Heads you get U$S 10 and tails you get nothing 2. Heads you get U$S 6 and tails you get U$S 4 Which of these lotteries would you choose? How much are you willing to pay to participate in the first one? How about the second one? Chapter 5 Uncertainty and Consume Slide 4
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er Behavior DESCRIBING RISK 5.1 Lotteries outcomes Things that can happen X 1 , X 2 , . . . X n probability Likelihood that a given outcome will occur Pr 1 , Pr 2 , . . . Pr n Payoff Value associated with a possible outcome Chapter 5 Uncertainty and Consume Slide 5 u expected outcome Probability-weighted average of all possible outcomes. Measuring risk E ( X ) = Pr 1 X 1 + Pr 2 X 2 + . . . + Pr n X n u outcome variance Probability-weighted average of the square difference between possible outcomes and the expected outcome. Var ( X ) = Pr 1 (X 1 -E(X))^2+ Pr 2 ( X 2 -E(X))^2+ . . . + Pr n (X n -E(X))^2
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er Behavior DESCRIBING RISK 5.1 Expected Value - Example The expected value measures the central tendency— the payoff or value that we would expect on average. Expected value = Pr(success)($40/share) + Pr(failure)($20/share) Chapter 5 Uncertainty and Consume Slide 6 = (1/4)($40/share) + (3/4)($20/share) = $25/share
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er Behavior DESCRIBING RISK 5.1 Variability u variability Extent to which possible outcomes of an uncertain event differ. OUTCOME 1 OUTCOME 2 Probability Income ($) Probability Income ($) Expected Income ($) Job 1: Commission .5 2000 1000 .5 1500 TABLE 5.1 Income from Sales Jobs Chapter 5 Uncertainty and Consume Slide 7 u deviation Difference between expected payoff and actual payoff. Job 2: Fixed Salary
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This note was uploaded on 11/23/2010 for the course UGBA 101A taught by Professor Mccullough during the Fall '08 term at University of California, Berkeley.

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Fitch%20-%20Class4%20F10-%20Risk - Chapter 5 Uncertainty...

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