Risk and uncertainty Flashcards
definition of risk seeker
someone who is only interested in the best outcome regardless of how small the chance is
definition of risk neutral
a risk neutral decision maker is concerned what will be the most likely outcome. this involves using expected values and selecting the strategy with the highest EV.
definition of risk averse
a risk averse decision maker acts on the assumption that the worst outcome might occur
formula for EV
sum of probability x value of the outcome
what is the maximin decision rule
is the rule that a decision maker should select the alternative that offers the least unattractive worst outcome ( to maximise minimum profits)
who would make a maximin decision
risk averse people
what is the maximal decision
the decision is to choose the option that could provide the best possible profit
what is regret
regret is the opportunity lost through making the wrong decision
