BEHAVIOURAL ECONOMICS & FINANCE
FORMULAS
LECTURE 1
VALUE OF A PROSPECT UNDER EXPECTED VALUE THEORY (EVT)
EV(x, p; y) = p . x + (1 – p) . y
EXPECTED VALUE OF A GAMBLE FOR I OUTCOMES
EV(xi, pi) = σ i . pi . xi
EXPECTED VALUE OF THE ST. PETERSBURG PARADOX
()
i
1
EV = σ ni=1 . . 2i = ∞
2
MARGINAL UTILITY
∂U
U 'X =
∂X
EXPECTED UTILITY THEORY (EUT)
EU(xi, pi) = σ i . pi . U(xi)
CERTAINTY EQUIVALENT (CE)
U(CE) = p . U(x) + (1 – p) . U(y)
COEFFICIENT ABSOLUTE RISK AVERSION (ARA)
U '' (w)
Coefficient ARA = - '
U (w)
COEFFICIENT RELATIVE RISK AVERSION (RRA)
U '' ( w)
Coefficient RRA = - w . '
U (w)
FORMULAS
LECTURE 1
VALUE OF A PROSPECT UNDER EXPECTED VALUE THEORY (EVT)
EV(x, p; y) = p . x + (1 – p) . y
EXPECTED VALUE OF A GAMBLE FOR I OUTCOMES
EV(xi, pi) = σ i . pi . xi
EXPECTED VALUE OF THE ST. PETERSBURG PARADOX
()
i
1
EV = σ ni=1 . . 2i = ∞
2
MARGINAL UTILITY
∂U
U 'X =
∂X
EXPECTED UTILITY THEORY (EUT)
EU(xi, pi) = σ i . pi . U(xi)
CERTAINTY EQUIVALENT (CE)
U(CE) = p . U(x) + (1 – p) . U(y)
COEFFICIENT ABSOLUTE RISK AVERSION (ARA)
U '' (w)
Coefficient ARA = - '
U (w)
COEFFICIENT RELATIVE RISK AVERSION (RRA)
U '' ( w)
Coefficient RRA = - w . '
U (w)
