Describing Risk Example a Job 1 is a job in which the income ranges from $1000 to $2000 in increments of $100 that are all equally likely Chapter 5 Slide 26
Chapter 5 Slide 26 Describing Risk ◼ Job 1 is a job in which the income ranges from $1000 to $2000 in increments of $100 that are all equally likely. Example
Describing Risk Example a Job 2 is a job in which the income ranges from $1300 to $1700 in increments of $100 that also, are all equally likely Chapter 5 Slide 27
Chapter 5 Slide 27 Describing Risk ◼ Job 2 is a job in which the income ranges from $1300 to $1700 in increments of $100 that, also, are all equally likely. Example
Outcome Probabilities for Two Jobs Job 1 has greater Probability spread: greater standard deviation and greater risk than Job 2 0.2 Job 2 0.1 Job 1 Income $1000$1500$2000 Chapter 5 Slide 28
Chapter 5 Slide 28 Outcome Probabilities for Two Jobs Income 0.1 $1000 $1500 $2000 0.2 Job 1 Job 2 Job 1 has greater spread: greater standard deviation and greater risk than Job 2. Probability
Describing Risk a Outcome Probabilities of two jobs (unequal probability of outcomes O Job 1: greater spread standard deviation o Peaked distribution: extreme payoffs are less likely Chapter 5 Slide 29
Chapter 5 Slide 29 Describing Risk ◼ Outcome Probabilities of Two Jobs (unequal probability of outcomes) ⚫ Job 1: greater spread & standard deviation ⚫ Peaked distribution: extreme payoffs are less likely
Describing Risk ■ Decision Making oA risk avoider would choose Job 2: same expected income as Job 1 with less risk Suppose we add $100 to each payoff in Job 1 which makes the expected payoff $1600 Chapter 5 Slide 30
Chapter 5 Slide 30 Describing Risk ◼ Decision Making ⚫ A risk avoider would choose Job 2: same expected income as Job 1 with less risk. ⚫ Suppose we add $100 to each payoff in Job 1 which makes the expected payoff = $1600