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Micro so > Ch8 : Risk-Attitudes > Flashcards

Ch8 : Risk-Attitudes Flashcards

1
Q

TRUE or FALSE - A risk-averse consumer will always purchase full insurance, no matter the price

A

FALSE - if the insurance is to expensive, no one will choose to purchase it. A risk averse person have a limit as to how much he is willing to pay to avoid risk.

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2
Q

Which attitude has a WTP lower that the expected gain ?

A

RISK-Averse

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3
Q

Which attitude has a WTP equal to the expected gain?

A

Risk-neutral

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4
Q

Which attitude has a WTP higher than the expected gain ?

A

Risk-seeking

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5
Q

Which attitude want to eliminate the risk

A

Risk-averse

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6
Q

Which attitude think that the expected value is the only thing that matters ?

A

Risk-neutral

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7
Q

Which attitude like risk

A

Risk-seeking

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8
Q

What is the equation of EV?

A

EV = p1V1 + p2V2 + … + pn*Vn

Where p1 + p2 + … + pn = 1

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9
Q

What is the expected value ?

A

It’s the outcome that you could obtain on average from playing a bet many times.

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10
Q

What is a fair bet ?

A

It’s a risky situation that yields a net expected payoff of 0

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11
Q

Give an exemple of a fair bet

A

Pay $100 for a 50% chance of winning $200

If you lose, the net payoff is -$100
If you win, the net payoff is $100

EV = 0,5-$100 + 0,5$100 = 0

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12
Q

Which attitude is unwilling to take a fair bet

A

Risk-averse

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13
Q

Which attitude is willing to take a fair bet ?

A

Risk-seeking

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14
Q

Which attitude is indifferent between taking a fair bet or not ?

A

Risk-neutral

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15
Q

What make not investors make the same investment decisions ?

A

Their different attitude towards risk

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16
Q

What is use to take account for differences in attitudes toward risk?

A

The notion of utility

17
Q

What is the equation of EU?

A

EU = p1 * U(V1) + p2 * U(V2)

Where p1 + p2 + … + pn = 1

18
Q

What is an individual’s expected utility ?

A

It’s her preference over choices that have uncertain outcomes ( gambles or a risky investment )

19
Q

What measure the utility of the expected value ?

A

The investor’s utility of he could get the EV with certainty

20
Q

How to find the maximum premium a person would be willing to pay for full insurance ?

A

U(value - premium) = EU

Indeed, you are willing to pay a price that makes you indifferent between fully insuring at this price and not insuring at all

21
Q

When are risks seeker willing to pay for insurance ?

A

They will pay for insurance if the premium is low enough

22
Q

In a decision tree, a risk-neutral will only look at what ?

A

At the expected gain

Compute EV

23
Q

In a decision tree, a risk-averse will only look at what ?

A

At the expected utility

Compute EU

24
Q

In which direction does a person’s attitude toward risk have an influence on the value of information ?

A

Having accès to information reduces risk, therefore, the more risk averse a person is, the more she values information

25
Q

How to guess the attitude of someone with knowing the amount of money he is willing to pay for an insurance against a loss

A

You need to compute the expected loss and compare it with the price he is willing to pay

P < exp loss : risk seeking
P > exp loss : risk averse
P = exp loss : risk neutral

26
Q

What is a fair premium ?

A

It’s a premium that equals the expected loss

27
Q

What is an insurance ?

A

It’s a way of making future wealth less uncertain by paying money today in exchange for a guaranteed monetary compensation in case of a bad outcome

28
Q

What is the purpose of an insurance ?

A

It is to reduce the spread in wealth between the different outcomes

29
Q

What is an insurance premium ?

A

It is the amount you pay to buy an insurance policy. This is equivalent to the price of the insurance policy

30
Q

When is an insurance policy actuarially fair ?

A

When the insurance premium is equal to the expected loss

31
Q

What is Diversification?

A

It’s a way of making future wealth less uncertain by spreading the risk over several unrelated investments

32
Q

What does diversification reduces ?

A

It reduces the variability of your return, thus making it more predictable

33
Q

Which information worth more ?

A

The perfect information is worth more than imperfect information

Micro so (5 decks)

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