Contingencies A contract implemented only when a particular state of Nature occurs is state-contingent E.g. the insurer pays only if there is an accident
Contingencies A contract implemented only when a particular state of Nature occurs is state-contingent. E.g. the insurer pays only if there is an accident
Contingencies A state-contingent consumption plan is implemented only when a particular state of Nature occurs. E.g. take a vacation only if there is no accident
Contingencies A state-contingent consumption plan is implemented only when a particular state of Nature occurs. E.g. take a vacation only if there is no accident
Preferences Under Uncertainty 2 states of nature At probability Ta consumption is a At probability Tna, consumption is na +兀=1 Utility is U(ca, Cna, Tay Tna)
Preferences Under Uncertainty 2 states of nature: –At probability a , consumption is ca –At probability na , consumption is cna – a + na = 1. Utility is U(ca , cna, a , na)
Preferences Under Uncertainty Expected utility function Von-Neuman-Morgenstern utility function EU=U(C)+IU(Cn) Positive affine transformation vu=au+b, a>0
Preferences Under Uncertainty EU U(c ) U(c ) = + a na a na Expected utility function Von-Neuman-Morgenstern utility function Positive affine transformation v(u)=au+b, a>0
Preferences Toward risk Risk averse Risk neutral Risk loving
Preferences Toward Risk Risk averse Risk neutral Risk loving