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Lecture# Expected Utility and Risk-Aversion

Description

This lecture covers the historical development of expected utility theory, starting from Bernouilli's proposal to Von Neumann and Morgenstern's axiomatization. It discusses the concept of risk-aversion, Arrow Pratt measures of risk, and various utility functions. The lecture also explores the critique of expected utility theory, the concept of risk premium, and the implications of risk-aversion in decision-making under uncertainty.

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In course

Instructor

FIN-609: Asset Pricing

This course provides an overview of the theory of asset pricing and portfolio choice theory following historical developments in the field and putting
emphasis on theoretical models that help our unde

Related concepts (143)

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Lecture

A lecture (from lēctūra ) is an oral presentation intended to present information or teach people about a particular subject, for example by a university or college teacher. Lectures are used to convey critical information, history, background, theories, and equations. A politician's speech, a minister's sermon, or even a business person's sales presentation may be similar in form to a lecture. Usually the lecturer will stand at the front of the room and recite information relevant to the lecture's content.

Expected utility hypothesis

The expected utility hypothesis is a popular concept in economics that serves as a reference guide for decision making when the payoff is uncertain. The theory describes which options rational individuals should choose in a situation with uncertainty, based on their risk aversion. The expected utility hypothesis states an agent chooses between risky prospects by comparing expected utility values (i.e. the weighted sum of adding the respective utility values of payoffs multiplied by their probabilities).

Risk aversion

In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome. Risk aversion explains the inclination to agree to a situation with a more predictable, but possibly lower payoff, rather than another situation with a highly unpredictable, but possibly higher payoff.

General recursive function

In mathematical logic and computer science, a general recursive function, partial recursive function, or μ-recursive function is a partial function from natural numbers to natural numbers that is "computable" in an intuitive sense – as well as in a formal one. If the function is total, it is also called a total recursive function (sometimes shortened to recursive function). In computability theory, it is shown that the μ-recursive functions are precisely the functions that can be computed by Turing machines (this is one of the theorems that supports the Church–Turing thesis).

Gifford Lectures

The Gifford Lectures (ˈgɪfərd) are an annual series of lectures which were established in 1887 by the will of Adam Gifford, Lord Gifford. Their purpose is to "promote and diffuse the study of natural theology in the widest sense of the term – in other words, the knowledge of God." A Gifford lectures appointment is one of the most prestigious honours in Scottish academia. The lectures are given at four Scottish universities: University of St Andrews, University of Glasgow, University of Aberdeen and University of Edinburgh.

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