Who Wants To Be A Millionaire Summary

15. Investment A has an expected return of $25 million and investment B has an expected return of $5 million. Market risk analysts believe the standard deviation of the return A is $10 million, and for B is $30 million (negative returns are possible here).

Kahneman’s article is an analysis of intuitive thinking and how it guides our decision-making. Although primarily aimed at the field of psychology, it is an interdisciplinary article with applications in economic theorising. Kahneman attempts to differentiate between two systems of thought, one of intuition (system 1) and one of reasoning (system 2), and argues that many judgements and choices are made intuitively, rather than with reason (a slower and more deliberate process). Intuitive decision making, which encompasses heuristics, although generally more efficient and rapid, makes the agent potentially subject to errors due to framing effects or violations of dominance. The analysis of the studies and theoretical situations also provides criticism of the commonly held model of the rational agent within economics. The article also further conceptualises Kahneman’s theory, the Prospect Theory (Kahneman & Tversky, 1979), which has descriptive applications of people’s choice in decision-making situations involving risk and known probability of outcomes. These situations are typically unexplained by the more normative rational agent model.

An investor would invest in a security for the return. However that return comes with a premium, the Risk. The higher the risk an investor is willing to take the higher the returns would

The lower the risk that is associated with an investment, that investment usually has a potential for lower returns. Conversely, if there are high levels of risk associated with an investment, and in turn a potential for a higher return.

In David Bach’s book The Automatic Millionaire, he reveals to readers a plan that could help them prosper in life financially and retire early without any financial stress. In the first chapter of his book his introduces to us the McIntyres, a normal married couple looking to retire early. After talking to the couple, Bach discovers that this is no regular couple financially. He finds out that this couple owns two homes without any mortgages, have absolutely no debt and have a net worth of almost two million dollars. He then investigates why this is so. He finds that the McIntyres have some guidelines that help them. They have goals instead of budgets, they pay themselves first, watch their latte factor or spending and make their savings automatic.

However, it’s unknown exactly what kinds of situations will cause ambiguity to be avoided or preferred. The literature is also unclear as to whether the reaction is from the, “missing probability parameter itself, or (2) motivational or attributional factors…” (Rode et al. 1999) associated with comparing opitions. The authors hypothesized that, “people associate ambiguous probabilities with highly variable outcomes” (Rode et al. 1999). If the outcome that the person needs is higher than the average payoff of each option, then the person should actually default to the ambiguous option because it would have more variability, which could have a greater chance

c) This individual is risk averse due the individual encountering diminishing marginal utility of money during a fair bet but the expected utility of the bet appears to be negative (Salvatore, 2011).

for example, a set of cases with $100,000 and $200,000 and another set with $0.01 and 300,000. These two sets of cases have almost the same expected value ($150,000), but the deal is much more enticing for the second group because of the much higher standard deviation. How a person interprets and handles the risk associated with the standard deviation depends on how much they like risk. Someone who is risk averse will be less willing to play on when facing a case set with a high standard deviation than someone who is risk seeking. The contestant 's risk tolerance can be measured by the deal they

To date there has been a contestation around risk approach. One approach is so called realism. The exponents of realism propose that risk is the outcome of probability

He believes that the lottery will make society stable and towns that have stopped doing them are crazy fools.

Prospect theory is an important alternative descriptive theory for decision-making under unreliable situation (Kahneman and Tversky 1979), which includes real life selection and psychological analysis between choices that involve risk. Prospect theory, which efforts to explain individual make decisions between risky replacements based on the value of potential gains and losses (Wakker 2010), advanced from expected utility theory, which explains that investors want to maximize expected utility of wealth when unclearly situations (Blavatskyy 2007). According to Kahneman and Tversky (1992), more recent researches perceived nonlinear preferences in choices that do not involve definite events in prospective theory. The concept of framing effect refers description invariances (Kahneman and Tversky 1992). To be specific, individual always makes the same decision in identical choice conditions. Also, decision makers have tendency to

These two decisions and the net pay off would be influenced by two key uncertainties viz. whether

Thus, there is no actual guarantee or scenario where George would earn exactly $26,574; it is simply the weighted average of profits and their likelihoods, if he had to make this decision a large number of times. Furthermore, the EMV for ‘Order 10,000 shirts’ was $26,574; this was quite close to the EMV for ‘Order 7500 shirts’, which was $24,181. Added to this, the payoffs for George from choosing the different alternatives vary, and there are possibilities for George making a loss. EMV is not a very accurate measure for George in this scenario and hence, a thorough risk analysis was conducted.

The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to

Many Americans are taught that investing is the avenue to wealth and financial independence in retirement. However, the questions: where should I invest, how much should I invest, or is my money safe precludes some from entering the investment arena. While this paper is not meant to answer those question, the first half will compare the daily performance of three well known stocks: Microsoft, Apple and Staples based on the probability of a daily loss and the probability of closing above the mean value, the second half will explore the probability of winning a game of chance.