Chapter 5

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University of Toronto Scarborough
Economics for Management Studies

Chapter 5Uncertainty and Consumer Behaviour 111028 921 PM 51DESCRIBING RISK List all possible outcomes of a particular action or events as well as the likelihood that each outcome will occurProbability Probabilitylikelihood that a given outcome will occuro Interpretation can depend on the nature of the uncertain event on the beliefs of the people involved or botho Subjective probabilitythe perception that an outcome will occur Based on personal judgment or experience Different people may attach different probabilities to different outcomes and thereby make different choices Used to calculate expected value and variability of the possible outcomesExpected ValueExpected Valueprobabilityweighted average of the payoffs associated with all possible outcomeso Measures central tendencythe payoff or value that we would expect on average Payoffvalue associated with a possible outcomeo EXPrXPrX PrX 1122nn Variability Variabilityextent to which possible outcomes of an uncertain event differo Same expected incomevariability of the possible payoffs is differentmeasures variability by recognizing that large differences between actual and expected payoffs imply greater risk Deviationdifference between expected payoff and actual payoff Standard Deviationsquare root of the weighted average of the squares of the deviations of the payoffs associated with each outcome from their expected valueso Lower SDless riskier the job
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