In this LP, the second of our series on Risk and Uncertainty, we’ll learn a bit more about risk, but also about uncertainty. We’ll start by seeing again how risk is analysed using Morgenstern and von Neumann’s expected utility theory. We’ll also learn about alternative approaches, such as the Friedman-Savage and Markowitz perspectives, but especially Daniel Kahneman’s prospect theory. We’ll end our study of risk and uncertainty by learning how game theory can help when analysing uncertainty.
Here’s the summary of this Learning Path:
Risk:
Risk, when outcomes are unknown but individuals can assign probabilities to each of them;
Risk aversion, or how to analyse individuals’ decisions using the expected utility theory;
Demand for insurance, the analysis of how to deal with risky situations.
EUT and alternative aproaches:
Expected utility theory, Morgenstern and von Neumann’s main contribution to economics;
Other approaches, such as the Friedman-Savage or Markowitz’s perspectives;
Prospect theory, Kahneman’s views on expected utility.
Uncertainty:
Uncertainty, when individuals cannot assign probabilities to each outcome;
Game theory, the perfect framework to analyse uncertainty.