PS6

Question 1

what is jensens inequality?

Answer 1

U ( Expected payoff ) > EU (lottery)

essentially valuing the expectation of the lottery less than the rational payoff

Question 2

How do you calculate U ( E[L] )

Answer 2

Just utility function of the expected payoff of the lottery

Question 3

How do you calculate the EU [ L ]

Answer 3

Instead do the weighting of each payoff calculated as utility, essentially taking into account each utility valuation of each outcome rather than the total payoff

Question 4

How do you calculate the Certainty Equivalent

Answer 4

U (CE) = EU [L]

Question 5

draw the graph for this

Answer 5

Question 6

how do you evaluate a lottery in prospect theory value function?

Answer 6

We do the probability of the outcome multiplied by each outcomes value function

Question 7

Stezka and Winter 2011 on why people gamble?

Answer 7

fun, social reasons, and sensation-seeking are important for many gamblers. While the existence of these “consumption benefits” does not prove the rationality of gamblers per se, it casts doubt on claims that gambling is automatically irrational just because gamblers lose money on average.

Question 8

what did friedman and savage (1948) say

Answer 8

suggest a utility function that is concave for small amounts of money, becomes convex for medium amounts of money, and returns to a concave form for higher amounts of money. Under this function, paying insurance premiums and gambling at the same time can be explained as rational behaviour of purely financially motivated agents. In particular, the poor buy insurance and may gamble, while the rich only buy insurance but do not gamble, which is largely in line with empirical evidence.

Question 9

How do Stetzka and Winter 2011 critique friedman 1948

Answer 9

DOESN’T FIT EMPIRICAL EVIDENCE

The article also discusses the evidence on a variety of possible deviations from rationality, such as the use of heuristics, the use of biased probability estimates, focalism, and the illusion of control etc. The evidence suggests that the majority of gamblers might be located somewhere between boundedly rational investors and rational consumers deriving non-financial benefits from their activities.