Economics and Finance of Risk and of the Future (The Wiley by Robert Kast

By Robert Kast

This e-book makes use of real-world examples to teach how person and collective hazards should be mixed and taken care of in a competent decision-making framework that pulls its concept from choice concept and marketplace dependent mechanisms. It then is going into deeper element by means of the results of getting to stand dangers (a) the place a few form of probabilistic description is on the market and (b) the place none is on the market, utilizing the instance of insurable dangers vs non-insurable hazards. back, by utilizing real-world examples it exhibits how decision-makers can do something about such occasions via a formal knowing and use of recent monetary innovations.

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Extra resources for Economics and Finance of Risk and of the Future (The Wiley Finance Series)

Sample text

The economic literature calls “certainty equivalent”, or more precisely, “present certainty equivalent”, an act of valuation when future consequences are uncertain. This appellation clarifies that valuation erases the decision problem’s temporal and uncertain aspects. Indeed, the criterion “averages” consequences over time and uncertain events. Obviously, this averaging may hide the limitations due to the conditions on preferences on which the criterion was constructed. For example, a simple criterion such as the discounted expected monetary value assumes that the decision-maker uses a probability distribution on the set of events and a discount factor, which should represent its preferences for present consumption.

Gérard Debreu has shown the existence of such a representation by a numerical function (utility function) in a 1954 paper, a fundamental one for microeconomics theory. 3 If one chooses to take a plane to New York, one possible consequence is that the plane lands at one of New York’s airports! 26 Economics and Finance of Risk and of the Future the preference order on consequences (a is chosen over a if and only if f a is preferred to f a ). For example, this is the case in consumer theory where an action is a commodity bundle, which is considered as its own consequence as well.

The bet, this time, was that this new feature would attract another category of tourists, and would facilitate accessibility to them without repulsing the previous ones too much. There were harsh controversies among the tourist branch about this bet, in particular on the duration of the stays of the waves of Northern Europeans attracted by the Mediterranean coast during the summer and passing over the bridge instead of being delayed by traffic jams. Simulations of different scenarios were implemented by the local tourism organisations, based on past data and on regions that had been through similar modifications.

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