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Uncertainty is quantified by a probability distribution which depends upon knowledge about the likelihood of what the single, true value of the uncertain quantity is. Variability is quantified by a distribution of frequencies of multiple instances of the quantity, derived from observed data.
The bonus was equivalent to approximately 8% of the average teacher salary in Chicago Heights, approximately $8,000. According to the authors, 'this suggests that there may be significant potential for exploiting loss aversion in the pursuit of both optimal public policy and the pursuit of profits'. [ 51 ]
The value function that passes through the reference point is s-shaped and asymmetrical. The value function is steeper for losses than gains indicating that losses outweigh gains. Prospect theory stems from loss aversion, where the observation is that agents asymmetrically feel losses greater than that of an equivalent gain. It centralises ...
The uncertainty effect, also known as direct risk aversion, is a phenomenon from economics and psychology which suggests that individuals may be prone to expressing such an extreme distaste for risk that they ascribe a lower value to a risky prospect (e.g., a lottery for which outcomes and their corresponding probabilities are known) than its worst possible realization.
The average payoff of the gamble, known as its expected value, is $50. The smallest guaranteed dollar amount that an individual would be indifferent to compared to an uncertain gain of a specific average predicted value is called the certainty equivalent, which is also used as a measure of risk aversion. An individual that is risk averse has a ...
The value of x, which is the safe option available to Player 2, varies in the range 60-260. For some values of x, the safe strategy (option R) is dominated by a mixed strategy of L and M, and thus would not be played in a Nash equilibrium. For some higher values of x the game is dominance solvable. The effect of ambiguity-aversion is to make R ...
Regret is a negative emotion with a powerful social and reputational component, and is central to how humans learn from experience and to the human psychology of risk aversion. Conscious anticipation of regret creates a feedback loop that transcends regret from the emotional realm—often modeled as mere human behavior —into the realm of the ...
The subjective value of a gamble is again a weighted average, but now it is the subjective value of each outcome that is weighted by its probability. [1] To explain risk aversion within this framework, Bernoulli proposed that subjective value, or utility, is a concave function of money.