nicholson微观经济理论（答案+PPT+习题库）-ch18.pptVIP

Chapter 18 UNCERTAINTY AND RISK AVERSION Probability The probability of a repetitive event happening is the relative frequency with which it will occur probability of obtaining a head on the fair-flip of a coin is 0.5 If a lottery offers n distinct prizes and the probabilities of winning the prizes are ?i (i=1,n) then Expected Value For a lottery (X) with prizes x1,x2,…,xn and the probabilities of winning ?1,?2,…?n, the expected value of the lottery is Expected Value Suppose that Smith and Jones decide to flip a coin heads (x1) ? Jones will pay Smith $1 tails (x2) ? Smith will pay Jones $1 From Smith’s point of view, Expected Value Games which have an expected value of zero (or cost their expected values) are called actuarially fair games a common observation is that people often refuse to participate in actuarially fair games Fair Games People are generally unwilling to play fair games There may be a few exceptions when very small amounts of money are at stake when there is utility derived from the actual play of the game we will assume that this is not the case St. Petersburg Paradox A coin is flipped until a head appears If a head appears on the nth flip, the player is paid $2n x1 = $2, x2 = $4, x3 = $8,…,xn = $2n The probability of getting of getting a head on the ith trial is (?)i ?1=?, ?2= ?,…, ?n= 1/2n St. Petersburg Paradox The expected value of the St. Petersburg paradox game is infinite Expected Utility Individuals do not care directly about the dollar values of the prizes they care about the utility that the dollars provide If we assume diminishing marginal utility of wealth, the St. Petersburg game may converge to a finite expected utility value this would measure how much the game is worth to the individual Expected Utility Expected utility can be calculated in the same manner as expected value The von Neumann-Morgenstern Theorem Suppose that there are n possible prizes that an individual might win (x1,…xn) arranged in ascending order of desirability