Uncertainty Flashcards
Consumers and firms behave differently when the degree of risk:
Changes
What will people usually do in riskier situations?
- Buy more insurance
- Take additional preventative actions
Risk is when:
The probability of each outcome is known or can be estimated
What is another term for best estimate?
Subjective probability
A probability distribution relates:
The probability of occurrence to each possible outcome
Calculation method for expected value is:
value of possible outcome X Probability of that outcome
Variance measures the difference between:
Actual value and expected value
What is the diminishing marginal utility of wealth?
Utility of an additional dollar is lower when you’re rich than when you’re poor
What is a fair bet?
A bet with an expected value of zero
What is a risk premium?
The amount a risk averse person would pay to avoid taking a risk
What are four ways to avoid risk?
- Say no
- Obtain info
- Diversify
- Insure
A risk neutral person would invest if the expected value is greater than:
The expected value of not investing
