Learning Objectives
253 words
1 min read
Visual companion
Python
Type and operator map
Python Week 1: the first filter for runtime behavior
View
Revision summary
What this note is really saying
Short form
# Learning Objectives - Apply expected value and decision trees to risky decisions - Distinguish risk preferences (risk-averse, risk-neutral, risk-seeking) - Understand asymmetric information: adverse selection and moral hazard - Week 6: Game theory basics - Probability fundamentals ## 1. Expected Value & Decision T...
Learning Objectives
- Apply expected value and decision trees to risky decisions
- Distinguish risk preferences (risk-averse, risk-neutral, risk-seeking)
- Understand asymmetric information: adverse selection and moral hazard
- Week 6: Game theory basics
- Probability fundamentals
1. Expected Value & Decision Trees
Expected Value: EV = sum(probability x payoff) for each outcome.
Decision Tree: Visual tool for sequential decisions under uncertainty.
2. Risk Preferences
Risk-Averse: Prefer certain outcome over risky with same expected value (diminishing marginal utility of wealth). Risk-Neutral: Indifferent between certain and risky with same EV. Risk-Seeking: Prefer risky over certain with same EV.
3. Asymmetric Information
Adverse Selection: Hidden information before transaction (buying a used car - lemon problem). Moral Hazard: Hidden action after transaction (insured driver drives recklessly).
Solutions: Screening (by uninformed party), Signaling (by informed party), Warranties, Deductibles.
| Concept | Formula/Description |
|---|---|
| Expected Value | EV = sum(Pi x Xi) |
| Risk Premium | Certainty equivalent - EV |
| Insurance | Pooling risk across individuals |
Q1: A project has 60% chance of 50k loss. EV?EV = 0.6 x 100 + 0.4 x (-50) = 60 - 20 = $40k Q2: What is adverse selection in insurance markets?High-risk individuals are more likely to buy insurance, raising premiums and driving out low-risk individuals. Q3: How does a deductible reduce moral hazard?By making the insured bear some cost, they have incentive to avoid risky behavior. Join Discord PreviousGame Theory & Strategic DecisionsNextFactor Markets & Labor Economics