PPT-Risky Curves: On the Empirical Failure of Expected Utility

Daniel Friedman R Mark Isaac Duncan James and Shyam Sunder Fifth LeeX International Conference on Theoretical and Experimental Macroeconomics Barcelona GSE Summer Forum Universitat. P.V. . Viswanath. For a First Course in . INvestments. Learning Goals. 2. How do we characterize individuals’ preferences for taking risk?. How do we use utility functions over asset returns?. How do we evaluate investors’ risk preferences?. Module Code CA660. Supplementary. Extended examples . Extended example – Value of information. Recall. : price of new computer tablet. When expected payoffs used in decision strategy, that action is selected which has the largest expected payoff. Hence, . Capital Allocation to Risky Assets. Risk with simple prospects. Investor’s view of risk. Risk aversion and utility. Trade-off between risk and return. Asset risk versus portfolio risk. Capital allocation across risky and risk-free portfolios. McGraw-Hill/Irwin. Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.. In business we are forced to make decisions involving risk—that is, where the consequences of any action we take is uncertain due to unforeseeable events. Where do we begin?. Insurance. “The policy of being too cautious is the greatest risk of all” . Attributed to Jawaharlal Nehru (former Prime Minister of India). “Risk comes from not knowing what you're doing.” . U: O-> R (utility maps from outcomes to a real number). represents preferences over outcomes. ~ means indifference. We need a way to talk about how preferences interact with uncertainty:. A . lottery . Warm-up Question. What do dating and marriage have to do with economics? . Scarcity. Choice. Utility maximization . Economics and Marriage. A market is any mechanism or institution that brings buyers together with sellers. John Lee. Department of Political Science. Florida State University. Utility. The idea that we can assign value to an action and then choose amongst a set of possible actions based on their value.. My grandma could offer me $50 or $100. I choose the offer that maximizes my utility. In this case, I choose $100.. x y: x is preferred strictly to y.. x . ~. y: x and y are equally preferred.. x y: x is preferred at least as much as is y.. p. ~. f. Preferences - A Reminder. Completeness. : For any two bundles x and y it is always possible to state either that . Insurance. “The policy of being too cautious is the greatest risk of all” . Attributed to Jawaharlal Nehru (former Prime Minister of India). “Risk comes from not knowing what you're doing.” . Shyam . S. under. JAPP Conference on Accounting and Risk Management. LSE, IE Business School and Univ. of Maryland. College Park, Maryland. May 29, 2014. “It is a veritable Proteus that changes its form every instant.”. Consumer Choice. Postulate: . an unproved and indemonstrable statement that should be taken for granted: used as an initial premise or underlying hypothesis in a process of . reasoning. Consumer choice postulate: People choose from available options to maximize their well-being (utility).. Lecture 2: Time and Risk. Shyam Sunder, Yale University. Yuji Ijiri Lectures. Tepper. School of Business, Carnegie Mellon University. Pittsburgh, August 22-26, 2016. An Invitation to Accounting. Causation . Daniel Friedman, UC Santa Cruz. Shyam. Sunder, Yale University. (expanding into book with . Duncan James and R. Mark Isaac) . ESA Tucson, November 17, 2012. 2. Risky Curves. 2. Fire: Circa 1750 CE. Everyone knew fire to be an element.