Decision making under risk

• What is the focus of Lecture 9?

  Introduction to Decision making Under risk
• Why is risk-based decision-making becoming popular?

  To ensure decisions are taken properly
• What are the two vital characteristics present in every decision?

  Uncertainty and outcome significance
• What did Sitkin & Pablo propose regarding risk-taking behaviors?

  Risk perceptions mediate the relationship
• What can influence risk perception?

  External factors such as framing
• What is the historical significance of risk since the Paleolithic period?

  • Key role in survival
  • Exposure to physical risks
  • Dealt with risks like transportation and war
  • Formation of risk plans as early as 3200 B.C.
• What is the oldest written document on risk plans?

  The Code of Hammurabi
• What happened to insurance contracts after the fall of the Roman Empire?

  They almost disappeared
• Who formulated the fundamental principles of probability during the Renaissance?

  Blaise Pascal
• What did Von Bortkiewicz do in the 19th century?

  Collected data on soldiers' deaths
• How is risk defined in economic theories?

  As an outcome with a certain probability
• What is Trimpop's definition of risky behavior?

  Behavior with perceived uncertainty about outcomes
• How does Fuller’s suggestion differ from earlier definitions of risk?

  It includes unconscious processes
• What encapsulates the trait of risk?

  Risk propensity
• What does risk propensity indicate?

  Willingness to take or avoid risks

  
• How does risk propensity affect decision-making?

  It influences theoretical modeling of risk-taking

  
• How does risk propensity change over time?

  It can change due to experience
• What do empirical findings suggest about risk aversion as individuals age?

  Individuals become more risk-averse
• What factors influence risk-taking behavior?

  Expectations, learning speed, and loss aversion
• What characteristics are associated with risk-takers according to the literature?

  • Impulsivity
  • Sensation-seeking
  • Difficulties in managing emotions
  • High levels of boredom
  • Moderate emotional intelligence
• What did Slovic and Sternberg question about financial risk-taking?

  Its robustness as a predictor for other risks
• What do Weber, Blais, and Betz argue about attitudes towards risk?

  They should be treated as domain-specific
• What evidence supports the need to investigate risk-taking across multiple domains?

  • Overwhelming evidence over 20 years
  • Studies by Shou & Olney, Blais & Weber, Hanoch et al.
• How do traditional decision theories differentiate between risk and uncertainty?

  Risk has known probabilities, uncertainty does not
• What does decision-making under risk involve?

  Known outcome probabilities
• What is the Expected Utility Theory (EUT)?

  A mathematical model for decision-making under risk
• Who first proposed the Expected Utility Theory?

  Daniel Bernoulli
• What was Bernoulli's argument regarding gamblers?

  They pay more than expected monetary value
• What did von Neumann and Morgenstern contribute to EUT?

  Developed axioms based on rationality assumptions
• What does the value of Utility represent?

  Measure of happiness or satisfaction
• What is a major critique of EUT?

  Decisions often violate rationality axioms
• What is the Ellsberg paradox?

  Preference shifts without changes in probabilities
• What are the major characteristics of normative theories?

  • Express how people should behave
  • Based on rationality of decisions
  • Do not account for real-life behavior
  • Utility function is poorly defined
• What is the purpose of descriptive theories like Prospect Theory?

  To explain how people actually behave
• Who formulated Prospect Theory?

  Kahneman and Tversky
• What is a key assumption of Prospect Theory?

  People do not maximize utility
• What is the two-phase process in Prospect Theory?

  Editing and evaluation of information
• What is the certainty effect in Prospect Theory?

  Overweighting certain options for gains
• What is loss aversion in Prospect Theory?

  Pain of losing is greater than pleasure of gaining
• What are some positive aspects of Prospect Theory?

  • Incorporates fear of missing out
  • Creates urgency and scarcity
  • Offers friendly nudges
  • Provides free trials for products