Just a reminder to myself that this exists and that I should remember to write up my notes and post about my thinky thoughts.
Wednesday, 25 November 2009
Friday, 30 October 2009
30.10.09
Decisions under risk and uncertainty.
Utility - subjective worth to individuals.
Risk - probabilities that are known. e.g. a coin toss = 0.5
Uncertainty - probabilities that are unknown. e.g. the likeliness of a a friend calling you at a certain time = ?
Expected value theory is calculated by the probability x outcome
E.g. Coin toss game. Each time you get a heads you keep playing but if you get a tails you stop and receive £1, £2, £4, £8 depending on how consecutive heads you tossed.
T = £0
HT = £1
HHT = £2
HHHT = £4
HHHHT = £8
...etc
Technically the cost to play this game should be an infinite as the possibility exists for this game to last forever equalling the highest payout.
Personally I find it more acceptable to choose the sure thing regardless of the prospective higher gains you may get if you take a gamble. Realistically though I believe human beings are greedy creatures and given the idea that they can reap a higher payout without any extra work would motivate them to abandon common sense and actually suffer because of it.
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Risk aversion occurs when people are reluctant to take a gamble with a higher outcome than a sure thing with a lower gain. Say for instance in the case of a lottery ticket, a guarantee of £10 is more desirable than a 0.0000001 chance of winning £1,000,000.
However this becomes redundant when people are faced with losses instead of gains, they become risk seekers to avoid a greater loss.
Isolation effect - evaluating your wealth to lose less.
This in a way makes more sense to me as when you're faced with a loss you would go to greater lengths to avoid it than chasing after a gain that you may not even be entitled to in the first place. In the case of say low income families or other extenuating circumstances too, I believe there would be a greater need to avoid loss.
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Prospect theory is how we code decision outcomes to a reference point. The reference point itself is quite subjective, it can also be an expectation or an aspiration.
E.g.
Working at a job and getting offered a £10k bonus, now if you only get a £2k bonus, objectively you've made a gain but subjectively it is a loss (as you have lost out on £8k).
This is a lot more personal than the other scenarios mentioned as it refers to you personally and what you may have been entitled to vs. what you received. In this case it seems more like the bonus was a promise and the company negated on this agreement. I believe if anyone was in this situation they would feel like they lost out as opposed to gain something objectively.
Utility - subjective worth to individuals.
Risk - probabilities that are known. e.g. a coin toss = 0.5
Uncertainty - probabilities that are unknown. e.g. the likeliness of a a friend calling you at a certain time = ?
Expected value theory is calculated by the probability x outcome
E.g. Coin toss game. Each time you get a heads you keep playing but if you get a tails you stop and receive £1, £2, £4, £8 depending on how consecutive heads you tossed.
T = £0
HT = £1
HHT = £2
HHHT = £4
HHHHT = £8
...etc
Technically the cost to play this game should be an infinite as the possibility exists for this game to last forever equalling the highest payout.
Personally I find it more acceptable to choose the sure thing regardless of the prospective higher gains you may get if you take a gamble. Realistically though I believe human beings are greedy creatures and given the idea that they can reap a higher payout without any extra work would motivate them to abandon common sense and actually suffer because of it.
---
Risk aversion occurs when people are reluctant to take a gamble with a higher outcome than a sure thing with a lower gain. Say for instance in the case of a lottery ticket, a guarantee of £10 is more desirable than a 0.0000001 chance of winning £1,000,000.
However this becomes redundant when people are faced with losses instead of gains, they become risk seekers to avoid a greater loss.
Isolation effect - evaluating your wealth to lose less.
This in a way makes more sense to me as when you're faced with a loss you would go to greater lengths to avoid it than chasing after a gain that you may not even be entitled to in the first place. In the case of say low income families or other extenuating circumstances too, I believe there would be a greater need to avoid loss.
---
Prospect theory is how we code decision outcomes to a reference point. The reference point itself is quite subjective, it can also be an expectation or an aspiration.
E.g.
Working at a job and getting offered a £10k bonus, now if you only get a £2k bonus, objectively you've made a gain but subjectively it is a loss (as you have lost out on £8k).
This is a lot more personal than the other scenarios mentioned as it refers to you personally and what you may have been entitled to vs. what you received. In this case it seems more like the bonus was a promise and the company negated on this agreement. I believe if anyone was in this situation they would feel like they lost out as opposed to gain something objectively.
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