Chapter 5 Choice Under Uncertainty
Chapter 5 Choice Under Uncertainty
Topics to be Discussed ■ Describing risk Preferences Toward risk ■ Reducing risk a The Demand for Risky Assets Chapter 5 Slide 2
Chapter 5 Slide 2 Topics to be Discussed ◼ Describing Risk ◼ Preferences Toward Risk ◼ Reducing Risk ◼ The Demand for Risky Assets
Introduction a Choice with certainty is reasonably straightforward a How do we choose when certain variables such as income and prices are uncertain (i.e. making choices with risk)? Chapter 5 Slide 3
Chapter 5 Slide 3 Introduction ◼ Choice with certainty is reasonably straightforward. ◼ How do we choose when certain variables such as income and prices are uncertain (i.e. making choices with risk)?
Describing Risk a To measure risk we must know 1)All of the possible outcomes 2) The likelihood that each outcome will occur(its probability) Chapter 5 Slide 4
Chapter 5 Slide 4 Describing Risk ◼ To measure risk we must know: 1) All of the possible outcomes. 2) The likelihood that each outcome will occur (its probability)
Describing Risk a Interpreting Probability The likelihood that a given outcome will occur Chapter 5 Slide 5
Chapter 5 Slide 5 Describing Risk ◼ Interpreting Probability ⚫ The likelihood that a given outcome will occur