ADMS 3300 Study Guide - Final Guide: Risk Aversion, Risk Premium, Emv

• School: York University
• Department: Administrative Studies
• Course: ADMS 3300
• Professor: Shamim Abdullah

Document Summary

Perfect information: evpi = | evwpi evwopi | If the outcome is less than the certainty or other option, take the certainty or other option. The probability of the expert"s correct = 1 (always correct) and wrong = 0 (never wrong) Imperfect information: evii = | evwii evwoii | I1 = expert says unfavorable i2 = expert says favorable. Evpi > evii: perfect information is always better than imperfect information. Utility is used for risk-avoider (concave) or risk-taker (convex) person. Utility is used for a risk neutral (line) person and emv does not capture risk attitude. Most people are risk lover when money ($) is low, and are risk avoider when $ is high. Utility can be presented in 1) utility function, 2) graph, and 3) table. Utility function: u(x) = 1- e-x/r where r is risk tolerance (r make u function flatter, smaller r more concave or more risk-avoider) to fine r(subjective): 0. 5r+0. 5(-r/2) = 0.