Risk in a decision making context Flashcards
Economic subject
An individual, business or organisation
What is the risk decision-making process
Economic subject > decision > action > outcomes
2 types of probabilities
objective and subjective
Objective probability
Based on numbers
Subjective
Gueses and estimates not based on data
Objective logic/ apiori
Rolling a dice leads to an equal chance - you know this before hand
Statistics/ aposteriori
After an ever you look at empirical data
Decoding
Choosing from different actions
Expectancy value formula
Sum (P*outcome)
What does variance measure
The spread - how far away the data is from the expectancy value
How do you find the variance?
Sum of (x-exp. value)^2 (P)
Standard deviations
Square root of the variance
Variation coefficient
Relative measure of dispersion/spread
When is the variation coefficient used?
When comparing 2 or more sets of data
What type of attitude do risk-loving people have?
Risk sympathy
What do risk-loving people look at in the probability distribution
spread
What do risk-neutral people look at in probability
The expectancy-value alone
What is the correct decision-making model for people who are risk-neutral
Expectancy value decision-making model
Expectancy value decision-making model
sum of expected values
What does Sigma / My decision model / (µ/σ)-Model account for?
Attitude to risk
What probability metrics are taken into account in the sigma decision-making model?
Spread and dispersion
What does a + g mean when there are losses
Risk aversion
What does a - g mean when there are losses
Risk sympathy
What is the formula for the sigma model
µ (expected value) + g*σ (standard deviation)
If µ + g*σ > µ
g represents risk sympathy
µ + g*σ < µ
g represents risk aversion
What does a g of 0 indicate?
Risk natural
Discus the limits to g
If g is too high then it can give illogical answers
Why do risk-averse buy insurance?
They are willing to pay the loadings above the expectancy-value
