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Uncertainty

  • Michael R. Hammock
  • J. Wilson Mixon
Chapter
  • 1.6k Downloads

Abstract

Most of the material covered so far deals with a world of certainty. Decision makers know the effects of consumption, employment, output, or pricing choices. This chapter considers decisions under conditions of uncertainty, in which economic actors cannot be sure of outcomes. Risk (we use the words risk and uncertainty interchangeably) relates to the existence of a range of possible outcomes that result from a decision. Specifically, the analysis treats an outcome x as the result of a gamble or lottery. The value of the outcome is random, and the probability of a particular realization of x can be described by a probability density function (or pdf), f(x). The chapter develops a model of risk preferences that relates to the nature of a utility function. The model is applied to ways of measuring differences in risk preferences. Finally, the model is applied to choices related to insurance.

Keywords

Utility Function Risk Aversion Risk Premium Risk Preference Utility Level 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

  1. 1.
    Arrow KJ (1971) The theory of risk aversion. Reprinted in: Essays in the theory of risk bearing. Markham, ChicagoGoogle Scholar
  2. 2.
    Knight FH (1921) Risk, uncertainty, and profit. Available at http://www.econlib.org/library/Knight/knRUP.html
  3. 3.
    Nicholson W, Snyder C (2008) Microeconomic theory: basic principles and extensions, 11th edn. South-Western, MasonGoogle Scholar
  4. 4.
    Pratt JW (1964) Risk aversion in the small and in the large. Econometrica 32:122–136CrossRefGoogle Scholar
  5. 5.
    Varian HR (1992) Microeconomic analysis, 3rd edn. Norton, New YorkGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2013

Authors and Affiliations

  • Michael R. Hammock
    • 1
  • J. Wilson Mixon
    • 2
  1. 1.Department of Economics and FinanceMiddle Tennessee State UniversityMurfreesboroUSA
  2. 2.Berry CollegeMount BerryUSA

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