LAW 122 Lecture Notes - Lecture 4: Interest Rate, Jaywalking, Inductive Reasoning
4 Jun 2018
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Chapter 1
Law of large numbers – insurance companies can charge a relatively small premium for large loss
exposures
Exogenous risk – we have no control and not effected by our actions ex. Earthquakes
Endogenous risk – are dependent on our actions ex. Smoking in bed, jaywalking
Some risks can be both, ex. Car accident
Objective risk – the relative variation of actual loss from expected loss. As a result, the more
observations, the lower the objective risk
Objective probability – the probability that is determined using the long run relative frequency of an
event based on the assumptions of an infinite number of observations and no change in the underlying
conditions
Subjective risk – uertaity ased o a perso’s etal oditio or state of id
Subjective probability – a idividual’s persoal estiate of a hae of loss
Inductive reasoning – relies on the analysis of past data
Deductive reasoning – used with probabilities where the probability is obvious from the nature of the
event
Pure risk – when there is a chance of a loss but no gain ex. Driving a car
Speculative risk – when there is a probability of a loss or gain ex. Investing in stocks, usually not
insurable
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Document Summary
Law of large numbers insurance companies can charge a relatively small premium for large loss exposures. Exogenous risk we have no control and not effected by our actions ex. Endogenous risk are dependent on our actions ex. Objective risk the relative variation of actual loss from expected loss. As a result, the more observations, the lower the objective risk. Objective probability the probability that is determined using the long run relative frequency of an event based on the assumptions of an infinite number of observations and no change in the underlying conditions. Subjective risk u(cid:374)(cid:272)ertai(cid:374)ty (cid:271)ased o(cid:374) a perso(cid:374)"s (cid:373)e(cid:374)tal (cid:272)o(cid:374)ditio(cid:374) or state of (cid:373)i(cid:374)d. Subjective probability a(cid:374) i(cid:374)dividual"s perso(cid:374)al esti(cid:373)ate of a (cid:272)ha(cid:374)(cid:272)e of loss. Inductive reasoning relies on the analysis of past data. Deductive reasoning used with probabilities where the probability is obvious from the nature of the event. Pure risk when there is a chance of a loss but no gain ex.
