Term

Definition
Likelihood that a given outcome will occur. 


Term

Definition
is the perception that an outcome will occur. 


Term

Definition
Probabilityweighted average of the payoffs associated with all possible outcomes. 


Term
The expected value measures the central tendency, which is... 

Definition
the payoff or value that we would expect on average.
E(X)=Pr1X1 +Pr2X2 +...+PrnXn 


Term

Definition
value associated with a possible outcome. 


Term

Definition
extent to which possible outcomes of an uncertain event differ. 


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Definition
Difference between expected payoff and actual payoff. 


Term

Definition
 marginal utility diminishes as income increases  curve is downwardsloping 


Term

Definition
 marginal utility increases as income increases  curve is upwardsloping 


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Definition
 indifferent between certain and uncertain events with the same expected income  curve is straight 


Term

Definition
sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur. 


Term

Definition
Condition of preferring a certain income to a risky income with the same expected value. 


Term

Definition
Condition of being indifferent between a certain income and an uncertain income with the same expected value. 


Term

Definition
Condition of preferring a risky income to a certain income with the same expected value. 


Term

Definition
Maximum amount of money that a riskaverse person will pay to avoid taking a risk. 


Term
The extent of an individual’s risk aversion depends on... 

Definition
...the nature of the risk and on the person’s income.
Other things being equal, riskaverse people prefer a smaller variability of outcomes.
The greater the variability of income, the more the person would be willing to pay to avoid the risky situation. 


Term
For highly riskaverse person to remain equally well off, an increase in this individual’s standard deviation of income requires... 

Definition
...a large increase in expected income. 


Term
diversification (similar to riskspreading) 

Definition
Practice of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related. 


Term
The ability to avoid risk by operating on a large scale is based on the "law of large numbers," which... 

Definition
tells us that although single events may be random and largely unpredictable, the average outcome of many similar events can be predicted. 


Term

Definition
Characterizing a situation in which an insurance premium is equal to the expected payout. 


Term
value of complete information 

Definition
Difference between the expected value of a choice when there is complete information and the expected value when information is incomplete. 


Term
point of behavioral economics 

Definition
to improve understanding of consumer demand (as well as the decisions of firms) by incorporating more realistic and detailed assumptions regarding human behavior. 


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Definition
The point from which an individual makes a consumption decision. 


Term

Definition
Tendency of individuals to value an item more when they own it than when they do not. 


Term

Definition
Tendency for individuals to prefer avoiding losses over acquiring gains. 


Term

Definition
Tendency to rely heavily on one or two pieces of information when making a decision. 


Term
law of small numbers bias 

Definition
people tend to overstate the probability that certain events will occur when faced with relatively little information from recent memory. 


Term
calculation of expected utility 

Definition
requires two pieces of information: a utility value for each outcome (from the utility function) and the probability of each outcome. 


Term
most important assumption about consumer behavior 

Definition
assumes perfect information about risk 


Term
steps for examining how people choose among risky alternatives 

Definition
1. quantify risk in order to compare riskiness of alternate choices 2. examine peoples' preferences toward risk 3. see how people can reduce or eliminate risk 4. see how, in certain situations, people choose the amount of risk they wish to bear 

