I.A.1.4.5 Summary

Question 1

Financial risks

Answer 1

• are gambles
• A gamble is a set of cash-value outcomes, with some probobilities attached to each outcome

Question 2

Rational decisions between financial risks

Answer 2

Achieved by:

1. defining a utility function u(x), a monotonically increasing function of cash value x
2. calculating the expected utility E[u(X)] of each gamble X
3. choosing the gamble that has the maximum expected utility or, equivalently, choosing the gamble with maximum certain equivalent

Question 3

Uncertainties

Answer 3

Each future choice should be considered in the context of current uncertainites; since, uncertainties in the future depend on what we do today