Risk and Utility in Decision Making

Flashcards covering key concepts related to risk aversion, utility, and decision-making in economic contexts.

Risk averse

A term used to describe individuals who prefer to avoid risk, often unwilling to take chances that could lead to a loss.

Expected payoff

The anticipated value of an investment or decision, calculated based on the potential outcomes and their probabilities.

Utility

A measure of satisfaction or happiness derived from consumption or wealth.

Marginal utility

The additional satisfaction or happiness gained from consuming one more unit of a good or service.

Cost-benefit analysis

A systematic approach to evaluating the strengths and weaknesses of alternatives to determine the best option based on costs and benefits.

Subjective preferences

Individual values and preferences that influence decision-making and perceptions of risk.

Degrees of risk aversion

Variations in how individuals respond to risk, leading to different decisions based on their personal thresholds for risk.

Utility curve

A graphical representation of how utility changes with wealth or consumption, illustrating varying degrees of risk aversion.

Probability of outcomes

The likelihood that a particular result will occur, often used in calculating expected payoffs in risk scenarios.

Risk intelligence

The ability to accurately assess and make decisions regarding risk based on gathering and interpreting information.