范里安微观经济学(第九版)chapter5.pptxVIP

Chapter 5 Choice under Uncertainty Topics to be Discussed Describing Risk Preferences Toward Risk Reducing Risk Introduction Choice with certainty is reasonably straightforward How do we make choices when certain variables such as income and prices are uncertain (making choices with risk)? Describing Risk To measure risk we must know: All of the possible outcomes The probability or likelihood that each outcome will occur States of Nature Possible states of Nature: “car accident” (a) “no car accident” (na). Accident occurs with probability ?a, does not with probability ?na ; ?a + ?na = 1. Accident causes a loss of $L. Contingencies A contract implemented only when a particular state of Nature occurs is state-contingent E.g. the insurer pays only if there is an accident. Contingencies A state-contingent consumption plan is implemented only when a particular state of Nature occurs. E.g. take a vacation only if there is no accident. Describing Risk Interpreting Probability Objective Interpretation Based on the observed frequency of past events Subjective Interpretation Based on perception that an outcome will occur Interpreting Probability Subjective Probability Different information or different abilities to process the same information can influence the subjective probability Based on judgment or experience Describing Risk With an interpretation of probability, we must determine 2 measures to help describe and compare risky choices Expected value Variability Expected Value: Definition Expected Value The weighted average of the payoffs or values resulting from all possible outcomes Expected value measures the central tendency; the payoff or value expected on average Expected Value – An Example Investment in offshore drilling exploration: Two outcomes are possible Success – the stock price increases from $30 to $40/share Failure – the stock price falls from $30 to $20/share Expected Value – An Example Objective Probability 100 explorations, 25 successes