01
Front
What distinguishes risk from uncertainty?
Back
Risk involves probabilities that are known or can be estimated.
Free Online Flashcard Deck
5 Risk, Value, and Choice Free Online FlashCards
Study 5 Risk, Value, and Choice with 12 free online flashcards. Review key terms, definitions, and concepts with this interactive flashcard deck.
12 cards
02
Front
How does expected utility evaluate an option?
Back
Expected utility weights each outcome’s utility by its probability and sums the results: EU(A)=∑ipiu(xi).
03
Front
What does utility represent in expected utility theory?
Back
Utility measures how desirable an outcome is to the decision-maker; it is not necessarily the outcome’s monetary amount.
04
Front
What is the expected monetary value of a 50% chance at $100 and 50% at $0?
Back
The gamble’s expected monetary value is $50: 0.5×$100+0.5×$0.
05
Front
Must someone prefer a $50-expected-value gamble to a sure $40?
Back
Not necessarily. With diminishing marginal utility of money, the sure $40 can have greater expected utility than the gamble.
06
Front
How does prospect theory frame outcomes?
Back
People commonly evaluate outcomes as gains or losses relative to a reference point, such as their current situation or expectations.
07
Front
How may prospect theory treat probabilities?
Back
Prospect theory allows probabilities to be psychologically weighted rather than treated only as their stated numerical values.
08
Front
What choice tendency can a concave value curve for gains encourage?
Back
A concave value curve for gains can encourage risk aversion, such as preferring a sure gain to a gamble with a higher average payoff.
09
Front
What choice tendency can a convex value curve for losses encourage?
Back
A convex value curve for losses can encourage risk seeking, such as gambling to avoid accepting a sure loss.
10
Front
What is loss aversion?
Back
Loss aversion is the tendency for a loss to feel more significant than an equal-sized gain.
11
Front
Why might someone reject a coin toss to win $100 or lose $100?
Back
A person may reject it because the possible loss can have a disproportionate impact, despite the gamble’s zero expected monetary value.
12
Front
How can framing shift choices?
Back
Framing changes how an option is described; presenting a choice as securing a gain or avoiding a loss can shift willingness to gamble.
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