Ch. 20 - Decisions Involving Uncertainty Flashcards
What is a fair bet?
A gamble that, on average, will leave you with the same amount of money
What does risk averse mean?
Disliking uncertainty
What is expected utility?
What your utility will be, on average, if you make a particular choice
What are the 5 ways to reduce risk?
- Risk spreading
- Diversification
- Insurance
- Hedging - offsetting risks
- Gathering info to reduce risks
What is risk spreading?
Breaking a big risk into manny smaller risks so that it can be spread over many people
What is risk neutral?
Indifferent to uncertainty
What is diversification?
Reducing risk by combining a large number of small risks whose outcomes are not closely related
What is systematic risk?
Risks that are common across the whole economy
What is insurance?
A promise of compensation if a specified bad thing happens
What is a premium?
The price of insurance
What does it mean to be actuarially fair?
An insurance policy that, on average, is expected to pay out as much compensation as it recieves in premiums
What is a hedge?
Aquire an offsetting risk
What are behavioural economics?
Economic analysis that includes psychological and sociological factors in assessing how people make economic decisions
What does it mean to be overconfident?
The tendency to overrate the accuracy of your forcasts
What is avalibility bias?
The tendancy to overestimate the frequency of events that are easily recalled, and to underestimate the frequency of less memorable events
