Lecture+21+April+13

Lecture+21+April+13 - Todays agenda Decision-making under...

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Today’s agenda Decision-making under Uncertainty Expected value Expected utility Risk aversion Responses to risk Risk sharing Hedging and diversification
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Choice under uncertainty in the large As an extraordinarily crude approximation, which is at least roughly consistent with the latest numbers in the latest scientific studies, if only gradually- ramped-up remedies are applied then mean global surface temperature change relative to pre-industrial-revolution levels will in two centuries or so be greater than 20° F with a ballpark probability estimate somewhere around .05 and will be greater than 36° F with a ballpark probability estimate somewhere around .01. Societies and ecosystems whose mean ambient temperature has changed in the geologically- instantaneous time of two centuries or so by 20° to 36° F are located in terra incognita, since such high average temperatures have not existed for hundreds of millions of years and such a rate of global temperature change might be unprecedented even on a time scale of billions of years. Martin Weitzman, Review of Economics and Statistics , 2008
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Expected value of a random variable Suppose you roll a fair die repeatedly. On average, how many dots do you see?
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This document was uploaded on 10/27/2011 for the course ECONOMICS 103 at Rutgers.

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Lecture+21+April+13 - Todays agenda Decision-making under...

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