Transcription of Choice under Uncertainty
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Choice under Uncertainty
Choice under UncertaintyJonathan LevinOctober 20061 IntroductionVirtually every decision is made in the face of Uncertainty . While we often rely onmodels of certain information as you ve seen in the class so far, many economicproblems require that we tackle Uncertainty head on. For instance, how should in-dividuals save for retirement when they face Uncertainty about their future income,thereturnondifferent investments, their health and their future preferences? Howshouldfirms choose what products to introduce or prices to set when demand isuncertain? What policies should governments choose when there is uncertaintyabout future productivity, growth, inflation and unemployment?Our objective in the next few classes is to develop a model of Choice behaviorunder Uncertainty . We start with the von Neumann-Morgensternexpected utilitymodel, which is the workhorse of modern economics. We ll consider the foundationsof this model, and then use it to develop basic properties of preference and choicein the presence of Uncertainty : measures of risk aversion , rankings of uncertainprospects, and comparative statics of Choice under with all theoretical models, the expected utility model is not without itslimitations.
in the presence of uncertainty: measures of risk aversion, rankings of uncertain prospects, and comparative statics of choice under uncertainty. As with all theoretical models, the expected utility model is not without its limitations. One limitation is that …
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