Lecture 4: Choosing Under Uncertainty

Question 1

5 things decision making depends on

Answer 1

1. value associated with each possible / uncertain outcome
2. players belief of the likelihood of each outcome
3. contingency
4. expected payoff
5. realised payoff

Question 2

Contingency

Answer 2

payoff to the outcome is contingent if something affecting payoff may or may not happen

Question 3

Expected payoff

Answer 3

how much the actor values taking the action given their beliefs on the probability that the contingency will occur

Question 5

Realised payoff

Answer 5

how much the actor values possible outcomes that may happen after contingency occurs

Question 6

Decision rule

Answer 6

player to choose strategy with highest expected payoff, where there is no dominant strategy equilibrium the decision rule will be used

Question 7

Risk dominant strategy

Answer 7

strategy resulting in the highest expected payoff when weighed up with other players actions with equal probability

Question 8

Risk neutral

Answer 8

behaving as an expected payoff maximiser

Question 9

Risk averse

Answer 9

willing to pay to avoid taking or being exposed to risks

Question 10

When can people behave in a risk averse manner

Answer 10

when they are very poor or very exposed to risk

Question 11

When can people behave in a risk neutral manner

Answer 11

if they are wealthy and not exposed to risk