INTBUS 6 Lecture Notes - Lecture 18: Allais Paradox, Fair Coin, Expected Utility Hypothesis
25 Sep 2020
School
Department
Course
Professor
Document Summary
Decision tree : expected value vs expected utility. Expected utility sum of all piu(xi) side-note: u in expected utility is cardinal aka any linear transformation can be used to predict your preferences: st. petersburg paradox: If you toss a fair coin repeatedly (with n tosses) you earn n. Expected value will be equal to infinity. We can define expected value as subjective and expected utility as subjective. People don"t care for the objective outcomes: risk attitudes: An amount that makes you indifferent between getting a sure thing and taking up a lottery. Amount equal to ce(l) in utility terms is the expected utility of a lottery. Amount equal to ev(l) gives us the utility of expected value of a lottery. Sure thing principle if we have a common branch replace x with any other number, this should not affect our preferences: asian disease violation of expected utility. 2 choices; disease that will kill 600 people:
