Economics of Risk

Objectives

The course is divided into 2 parts. In the first part, we will study choices in a context of risk, and apply the theoretical results to several fields of application: insurance, finance and public decision-making. In the second part, we will extend our analysis to choices in an uncertain context, with an introduction to strategic uncertainty.

Course outline

Introduction: rational preferences, choice modeling, risk and uncertainty
Choice in a risky world
Central concepts: stochastic dominance, risk aversion, risk premium
First two criteria: expectation and expectation-variance
Expected utility, risk attitude measurement and behavioral paradoxes
Applications: insurance choice, savings choice, portfolio choice
Choice in an uncertain world
First two criteria: Maximin and Hurwitz criteria
Subjective utility expectation
Introduction to strategic uncertainty
Extensions: behavioral paradoxes and ambiguity aversion

Prerequisites

Standard microeconomics