Loss and Risk Aversion in Games and Decisions

Introduction (via Bram Driesen)

This thesis deals with topics in decision theory, game theory, and the interface between these two disciplines. The subfield of decision theory under consideration in the present text, decision under uncertainty, examines how individuals make decisions and choices in an uncertainworld, and how these choices are affected by the behavioral constitution of the decision maker. This is best illustrated by a classic example of Bernoulli (1738), one of the founding fathers of the field. Consider a lottery ticket that with equal probability yields either e 20,000, or e 01. The question Bernoulli asked is at what price one should sell such a ticket. That is, what sure amount of money would its owner consider an adequate remuneration for the chance of gaining e 20,000, and the risk of ending up with nothing? Building further on this example, one might wonder how the decision at what price to sell changes if we are not considering a lottery ticket, but rather a bet of e 20,000 on a tennis match between two unknown players. And how would things change if one is not the seller of such a ticket, but the buyer? That is, at what price should one buy such a ticket?

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01. June 2010 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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