13_UncertaintyFundamentals-1

13_UncertaintyFundamentals-1 - “Although our intellect...

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Unformatted text preview: “Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.” –Karl Von Clausewitz ECON 410 Uncertainty Fundamentals "Here's to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes... the ones who see things differently -- they're not fond of rules... You can quote them, disagree with them, glorify or vilify them, but the only thing you can't do is ignore them because they change things... they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”-Steve J obs (1955-2011) ECON 410 Uncertainty Fundamentals 3 Class 13 - Uncertainty Fundamentals 4 Class 13 - Uncertainty Fundamentals Self-Clicker Question (P): What would YOU do? 1 2 86% 14% 1. Take the sure money 2. Flip the coin Self-Clicker Question (P): What should MY VOLUNTEER do? 1 2 86% 14% 1. Take the sure money 2. Flip the coin Self-Clicker Question (P): What would YOU do? 1 2 75% 25% 1. Take the sure money 2. Flip the coin Self-Clicker Question (P): What should MY VOLUNTEER do? 1 2 82% 18% 1. Take the sure money 2. Flip the coin 9 Class 13 - Uncertainty Fundamentals 10 Class 13 - Uncertainty Fundamentals 11 Class 13 - Uncertainty Fundamentals Lottery Ticket Cash I 1 12 Class 13 - Uncertainty Fundamentals Probability 50% win $10, Probability 50% win $0 13 Class 13 - Uncertainty Fundamentals Probability 49% win $10, Probability 51% win $0 14 Class 13 - Uncertainty Fundamentals Probability 48% win $10, Probability 52% win $0 15 Class 13 - Uncertainty Fundamentals Probability 48.5% win $10, Probability 1.5% win $0 16 Class 13 - Uncertainty Fundamentals 17 Class 13 - Uncertainty Fundamentals Lottery Consider a bundle of goods, (x1, x2,…xn). A lottery over the bundles is a set of probabilities (p1, p2,…pn) such that 1. p1+p2+…+pn=1 2. pi >= 0 3. pi is the probability the consumer receives bundle xi Things: Lottery: 0.25 0.35 0.40 18 Class 13 - Uncertainty Fundamentals Things: Lottery: 0.25 0.35 0.40 Lottery The lottery, (0.25, 0.35, 0.40), over (apples, oranges, bananas) is the lottery that gives you: • An apple with 25% chance • An orange with 35% chance • A banana with 40% chance Group-Clicker Question (P) Is the lottery (0.5, 0.1, 0.2) a valid lottery over (cash, prizes, nothing)? 1 2 95% 5% 1. Yes 2. No Group-Clicker Question (P) Is the lottery (0.5, 0.1, -0.4) a valid lottery over (cash, prizes, nothing)? 1 2 100% 0% 1. Yes 2. No Group-Clicker Question (P) Which lottery represents our Let’s Make a Deal Lottery over ($10, $0)? 1 2 3 4 97% 0% 3% 0% 1. (0.50, 0.50) 2. (0.10, 0.30) 3. ($10, $0) 4. ($3, $10) Group-Clicker Question (P) Is the lottery (1,0) a valid lottery over ($3,$0)?...
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This note was uploaded on 01/05/2012 for the course ECON 410 taught by Professor Codrin during the Fall '07 term at UNC.

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13_UncertaintyFundamentals-1 - “Although our intellect...

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