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Choice under uncertainty and the economics of information

5 important questions on Choice under uncertainty and the economics of information

One important property of a gamble is its expected value:

The sum of all possible outcomes, weighted by its respective probability of occurrence.

Risk sharing, or risk pooling, works because of statistical property called the law of large numbers, which is:

A statistical law that says that if an event happens indecently with probability p in each of N instances, the proportion of cases in which the event occurs approaches p as N grows larger.

While we cannot central whether a coin comes down heads or tails, we do have some control over most other events. Because of this, a principle-agent problem can arise, which means:

A principe employs an agent to do a job for him but cannot know for sure how much effort the agent is putting into the job. There are three aspects of the principle-agent problem: adverse selection, moral hazard and signaling.

Adverse selection occurs when a principle is deceasing which agent to employ. Moral hazard occurs after the agent has been employed. This contains:

Incentives to take greater risk because the cost of that rist is borne by others. E.g. Insurance, taking precautions is costly, and people who know their losses are fully covered by insurance are less likely to take them. Performance-related pay could be a solution (thought debatable).

Signalling, communication that conveys information has two important properties:

Signals must be costly to fake
the full-disclosure principle

The question on the page originate from the summary of the following study material:

Microeconomics and Behaviour | 9780077174088 | Robert H Frank, et al

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Topics that are related to Choice under uncertainty and the economics of information

Choice under uncertainty and the economics of information - Choice under uncertainty - The Von Neumann-Morgenstern Expected Utility model

Choice under uncertainty and the economics of information

5 important questions on Choice under uncertainty and the economics of information

One important property of a gamble is its expected value:

Risk sharing, or risk pooling, works because of statistical property called the law of large numbers, which is:

While we cannot central whether a coin comes down heads or tails, we do have some control over most other events. Because of this, a principle-agent problem can arise, which means:

Adverse selection occurs when a principle is deceasing which agent to employ. Moral hazard occurs after the agent has been employed. This contains:

Signalling, communication that conveys information has two important properties:

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Choice under uncertainty and the economics of information - Choice under uncertainty - The Von Neumann-Morgenstern Expected Utility model

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