Course 001: Topic 5
By parikshit On · Add Comment
Microeconomic Theory
Topic 4: Choice Under Uncertainty
- Lecture Slides
- Problem Set
- Answer Key
Applications and Links
- Deal or No Deal? This is an online game you can play to test your stomach for taking risk! It is based on an American TV show of the same name. Try to imagine that you are playing for actual money.
- St. Petersburg Paradox: I mentioned this at the beginning of the lectures on this topic. This entry from the Stanford Encyclopedia of Philosophy discusses the history of the paradox, its more advanced variants and various attempts to explain it.
- How Coffee Made us Safe: The modern insurance business started in Lloyd's Coffee House in London, where shipping merchants and sailors often congregated. The story illustrates why drinking hot beverages and chatting with friends is good for economics students or business people. Fans of JP's tea stall should be pleased.
- Equity Premium Puzzle: Historically, the average returns on stocks has been much higher than returns on risk-free assets. Of course this can be attributed to risk aversion of investors but the risk premium (difference between the average returns on stocks and safe assets) is thought to be too large to be explained satisfactorily by risk attitudes. Siegel and Thaler review the literature on this puzzle.
- A Brief History of Risk: Peter Bernstein's book Against the Gods is a nice account of how humanity has tried to understand as well as cope with one of the fundamental facts of life -- risk. It tells the parallel story of developments in probability theory and actuarial science on the one hand, and institutions like insurance markets on the other.