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Unformatted text preview: Economics 101Lecture 9 Risk and Uncertainty I George J. Mailath February 15, 2011 Probability Definition (MerriamWebster) Probability : 1 the quality or state of being probable ; 2 something (as an event or circumstance) that is probable ; 3 the ratio of the number of outcomes in an exhaustive set of equally likely outcomes that produce a given event to the total number of possible outcomes, or 4 the chance that a given event will occur. Frequentist Definition The probability of a Head on a coin toss is the frequency of Heads in a large number of coin tosses. John Kerrich (an English/South African mathematician), while interned in Denmark during WWI, tossed a coin 10,000 times and obtained altogether 5067 Heads . A fair coin: after a large number of coin tosses, half the coin tosses result in Heads . (But a trained magician can make a coin always come up Heads .) Objective probability : Fair coins, or roulette wheels, casinos. In principle, experiment can be replicated (drug interactions, car accidents, house fires, etc.) Subjective probability : horse races, performance on an exam, etc. Expected values I A random variable is just a variable whose value is determined randomly: For example, X = 100 , with probability 1 2 , , with probability...
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 Spring '08
 DANNICATAMBAY
 Economics, Microeconomics

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