11
votes
Accepted
What is the average economic value of a human life?
It depends on the context, of course, but most often in policy analysis "the value of a life" has nothing (directly) to do with output, etc, but instead means the maximum amount that people would want ...
- 1,553
8
votes
Accepted
Independence axiom of lottery when $\alpha \ge 1$
To understand why $\alpha$ must be constrained in $(0,1)$, one has to contemplate the meaning of the expression
$$\alpha L$$
when $L$ is a "lottery". How is a lottery denoted mathematically? Authors ...
- 33.4k
8
votes
Accepted
Second order stochastic dominance
The answer to 2. is no.
One way to see this is from MWG's Property 6.D.2: $F$ SOSD $G$ if and only if
\begin{equation}
\int_0^xF(t)\mathrm dt \le \int_0^xG(t)\mathrm dt \quad\text{for all }x.
\end{...
- 15.3k
7
votes
Why is everyone suggested to specialize their education?
Note: I did not vote down on this question, and it is not clear why anyone would do so.
Why is so common to suggest university students to specialize in order
to get a better paid job?
Because ...
- 1,765
7
votes
Second order stochastic dominance
The answer to 1.
Your conjecture is correct. Consider lotteries $A,B$ where $A$ guarantues a payoff of 1 while $B$ yields 0 or 4, each with 50% probability.
$B$ does not SOSD $A$, as you can easily ...
- 28.6k
6
votes
Accepted
Is the loan principal ever delivered in pieces over time?
Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation.
The rationale is clear : the corporation wants to ...
- 33.4k
6
votes
Most utility functions under risk and uncertainty generalizes expected utility. What is deadly wrong if a model does not include EU as special case?
Many people accept the axiomatizations of expected utility as normatively appealing, especially in contexts of pure risk. For people with this view, rational decision-makers should behave in ...
- 11.7k
5
votes
Will high computing power substitute the certainty-equivalence assumption?
This is perhaps a good opportunity to point out that the "certainty equivalence" concept means one thing in microeconomics/choice under uncertainty theory, while it means something different in ...
- 33.4k
5
votes
Accepted
Does dollar cost averaging actually have any advantage over one time investment?
The seminal academic criticism of dollar cost averaging on many specifications of economic conditions is A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy (Constantinides (...
- 16.3k
5
votes
What is the need for a special purpose entity/vehicle in mortgage backed securities
Here are a few reasons that build on @Dismalscience's answer.
Capital requirements: Banks don't typically need to hold capital
against loans they originated but subsequently moved into an SPV. This ...
- 16.3k
5
votes
Accepted
Why is the risk premium always positive for risk averse individuals?
Suppose that the vector $W=\left(w_1,w_2,\dots,w_n\right)$ represents wealth in $n$ possible states. In addition, assume the probability of each state occurring is represented by the vector $\pi=\left(...
- 436
4
votes
Accepted
Sanity of lending out made-up money
There are two ways I can think of interpreting this question.
My first thought is that a single bank doesn't lend out more money than it has, but the banking system does. So let's say someone ...
- 6,578
4
votes
What is the need for a special purpose entity/vehicle in mortgage backed securities
SPVs are typically used in MBS issuance to get the loans off the issuing bank's balance sheet, freeing up that balance sheet space to make more loans and providing bankruptcy-remoteness (i.e., the SPV ...
- 6,374
4
votes
Intuition behind risk premium
There is a typo in the figure that introduces some confusion in the previous answer, which is basically wrong.
Based on the numbers and the figure, the utility is such that $$u=\sqrt{x},$$ so
$$E[u]=\...
- 6,885
4
votes
What is the average economic value of a human life?
As a graduate in health economics, I'd use the QALY threshold to answer this question. A QALY is a quality adjusted life year i.e., a year in perfect health-related quality of life, two years with 50% ...
- 41
4
votes
References for particular definitions of risk and uncertainty
Knight's 1921 essay was not written in formal mathematics (and trying to formulate a direct translation into modern mathematics may be quite problematic). Since Knight's time, a formal decision theory ...
- 906
4
votes
Accepted
Is DARA utility implying CRRA most of the time?
Using the results derived in this answer we have the following relations for any utility function:
(Absolute Risk Aversion = $A(c)$, Relative Risk Aversion = $R(c)$) :
$$A(c) = -\frac {u''(c)}{u'(c)...
- 33.4k
4
votes
Is DARA utility implying CRRA most of the time?
Let me turn my comment into a quick answer:
Using the notation of the article you quoted $A(c)$ is the absolute risk aversion and $c A(c)$ the relative risk aversion. If $A(c)$ is decreasing, the ...
- 1,852
3
votes
References for particular definitions of risk and uncertainty
I finally found a reference that defines the terms risk and uncertainty the way I do. Sven Ove Hansson "Decision Theory: A Brief Introduction" (1994) writes on p. 27-28:
In one of the most ...
- 2,260
3
votes
Negative expected value; risk neutral choice
There are three type of individuals : risk averse, risk neutral and risk loving.
Individuals evaluate risky prospects such as to maximize the expected level of their utility. So, an agent is risk ...
- 31
3
votes
Risky Assets over Bernoulli Utility
Regarding your first question, the space on which you can apply Lebesgue's theorem is $\mathbb{R}_{+}^{N}$. The relevant $\sigma$-algebra is the Borel $\sigma$-algebra and the integration corresponds ...
- 3,232
3
votes
References for particular definitions of risk and uncertainty
At the risk of being a bit repetitive from my earlier comments, I believe there are a few notable caveats and assumptions made in my answer. Wherever possible, I’ll try to highlight the assumptions ...
- 1,370
3
votes
Why does Mascolell define second-order stochastic dominance as such?
The motivation is I believe clearly stated in p. 197 beginning of the section, where they write that they want to use Second-order stochastic dominance to reflect comparisons related to "riskiness/...
- 33.4k
3
votes
How to estimate market risk using only publicly available data?
This paper on Fluctuations in Uncertainty may be helpful and relevant.
The volatility of the stock market or GDP is often used as a measure of uncertainty because when a data ...
- 6,885
3
votes
Accepted
Construct utility function for a risk-averse agent
If $-|x-a|$ represents the monetary payoff associated with the policy choice $a$, then $u(a) =-\left(|x-a|^\gamma\right)$ is risk averse for $\gamma > 1$, and risk loving for $0<\gamma < 1$.
- 8,208
3
votes
How is an interest swap collateralized
I can clarify a few points that @Brian Romanchuk raised. Nowadays newly transacted US$ interest Rate swaps must be cleared at a clearing house, unless the client claims an exemption (for example, ...
- 1,171
3
votes
Accepted
Can we model risk with only probability?
I don't think it even makes sense to talk about risk without specifying the payoffs.
Take your two examplary gambles and suppose that $a=b=c=d=e=0$. In that case, there is no risk involved at all. It ...
- 5,270
3
votes
Accepted
Proof that $U(\sum_{n=1}^{N}{p_nL_n})=\sum_{n}^{N}{p_nU(L_n)}$
$p\circ x\oplus(1-p)\circ y$ is a lottery that gives you the prize $x$ with probability $p$ and the price $y$ with probability $(1-p)$. Unless $x,y$ can be identified with numbers, such as amounts of ...
- 11.7k
Only top scored, non community-wiki answers of a minimum length are eligible