Main ?takeaways? from Thursday's lecture? - Business Risk ...

The?main ?takeaways??from last Thursday?s lecture are as follows:

1. Expected utility is positively related to expected wealth and skewness of wealth, and inversely related to variance?of wealth and ?fat-tailedness? (i.e., kurtosis) of wealth.? On p. 15 of the ?Decision Making under Risk and Uncertainty, part 3?, I provide a?numerical example in which two risks which have same mean (5) and skewness (0) are compared.? In that example, it turns out that?a risk averse person will prefer the higher variance risk (risk ?x?) because it is less fat-tailed than the lower variance risk (risk ?y?).
2. ?Special cases? of the expected utility framework include the so-called ?mean-variance? model which occupies a central role in finance, and the stochastic dominance model.? What next?? On Tuesday, October 2, we will finish our coverage of stochastic dominance and then devote the remainder of the class period to a review sessions (be sure to look over and implement my instructions contained in the blog posting entitled ?Lecture notes collection, 8/21 ? 9/27 (first 10 class meetings) and assignments for Tuesday, October 2?.

Source: http://risk.garven.com/2012/09/30/main-takeaways-from-yesterdays-lecture/

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