PDF-plications of Expected Utility Maximization under Risk Yucan Liu and C

C Richard Shumway Professor School of Economic Sciences Washington State University Pullman WA 991646210 Phone 5093351007 Email Selected Paper prepared for presentation at the American A. 1 1 Marginal utility analysis requires numerical measureof utility to determine the optimal consumption combinations A new approach is developed to analyze utility and consumer behavior It does not re for Professors. Spring 2010 Version. This file as well as all other PowerPoint files for the book, “. Risk Management and Insurance: Perspectives in a Global Economy. ” authored by Skipper and Kwon and published by Blackwell (2007), has been created . 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, . for Professors. Spring 2010 Version. This file as well as all other PowerPoint files for the book, “. Risk Management and Insurance: Perspectives in a Global Economy. ” authored by Skipper and Kwon and published by Blackwell (2007), has been created . 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. Sri Hermawati. Maximising what?. three closely related . principles. The principle of . maximising. expected monetary value. The . principle of . maximising. expected value. The . principle of . maximising. 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 . 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.. Sri Hermawati. Maximising what?. three closely related . principles. The principle of . maximising. expected monetary value. The . principle of . maximising. expected value. The . principle of . maximising. 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.” . March 23, 2010. Outline. Intro & Definitions. Why learn about probabilities and risk?. What is learned?. Expected Utility. Prospect Theory. Scalar Utility Theory. Choices, choices, choices.... In the lab, reinforcement is often uniform. Spring 2010 Version. This file as well as all other PowerPoint files for the book, “. Risk Management and Insurance: Perspectives in a Global Economy. ” authored by Skipper and Kwon and published by Blackwell (2007), has been created .