Expected utility Flashcards
1
Q
How can we express utility of an action when the outcome is risky?
A
Use expected value and/or expected utility
2
Q
In EV(A) = Sigma (pi*ci), what is A, Pi and Ci?
A
i is the state of the world resulting from action A
A = Action taken
Pi = probability of state i
ci = income in state i
3
Q
What does an individual utility function determine about them?
A
Their level of risk aversion
4
Q
What kind of utility function does a RN, RA, RL individual have?
A
RN - Linear/straight line
RA - Concave
RL - Convex
5
Q
Risk neutral means someone is indifferent between…
A
Gaining the expected value for sure, and taking the gamble
6
Q
Risk averse means someone prefers to receive…
A
the certain payoff rather than the risky outcome (EV of the for sure gamble rather than taking on the gamble itself)
