ECO204Y1 Lecture Notes - Lecture 13: Bayes Estimator, Risk Neutral
Document Summary
Eu (expected utility) and u(ev) (utility of expected value) for uncertain outcomes are different for different risk preferences. Shows how much people are willing to pay to eliminate risk. Ev - ce is discount due to risk. In uncertain situations, not knowing what will happen, utility is eu. If given option, would rather have ce or greater for sure than uncertainty. Ce represents the lowest payment you are willing to accept for certainty. Will accept any amount greater than ce for certainty. For any value less than ce, utility is lower than eu of uncertain situation. For two agents facing same risky situation, agent with lower ce is more risk averse. Deriving utility functions of risk averse agents making decisions under uncertainty. When deciding between option x and y, must compare eu(x) vs eu(y) To start, identify highest and smallest dollar values in decision tree.
