Game Theory, Deal or No Deal

The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).

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.

Speculative risk exists when there is uncertainty about an event that can produce either a profit or a loss.

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

In today’s economy, decision-making skills vary for each household; however, the bottom-line goal for every individual is to get the most for their money. In order to do this, there are 4 principles of individual decision-making: facing trade-offs, evaluating what one is giving up to obtain their goal, thinking at the margin, and responding to incentives.

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

The Standard Deviation is much smaller at 6.2% compared to Stock A. “Standard deviation is calculated based on the mean.” (WHAT IS STANDARD DEVIATION, n.d.) The space of each data point from the mean is squared, summed and averaged to find the variance. The difference is a result of taking the mean of the data points, subtracting the mean from each data point individually, squaring each of these results and then taking another mean of these squares. Ordinarily, the smaller a stock’s standard deviation, the less volatile or risky it is. The higher the standard differential, the more scattered the profits are, consequently is more dangerous. The additional 1% of the profit produced by Stock A is not worth the risk associated with Stock

For standard deviation, we use it to measure the stand-alone risk of certain asset, which include both the systematic risk and unsystematic risk. However, when combining the assets into the portfolio, due to the correlation among the assets, certain amount of unsystematic risk could be diversified. Suppose all of the unsystematic risks could be diversified after the combination of the assets, we could use ß to measure each variable’s risk. So we have the ß of Vanguard for 0.98, the ß for Reynolds for 0.71 and the

Risk literature often separates 'risk ' from 'uncertainty ', defining the risk as a measurable probability that something will happen, however, even where experts claim they can give an exact probability value to a risk, there is always a possibility that the experts may be wrong (Hansson 2002 p4). In common usage the words 'risk ' and 'uncertainty ' are often synonymous (Lupton 1999 p9)

numbers and statistics can sometimes be risky so this form of decision making is most

In the case study, Fastsave is a retail chain store company that was doing quite well, and had more than enough financial resources to make investments. In other words, they are able and they have the capacity to take risks with no significant danger of losses. The real risk here was whether it would be worth it for them in terms of time and effort. The attitude to risk is also based on individuals who personalities vary. In the case study, individuals who are more reserve tend to be more cautious as they are realistic while the others who are more risky or outgoing tend to be more straightforward as they maintained an optimist

The subjective risk is uncertainty based on one’s mental condition or state of mind. Accordingly, the objective risk is measurable and statistical; the subjective risk is personal and not easily measured.

Risk can be defined as “The possibility of a (negative) event occurring”. Risk and uncertainty go hand in hand. When you are certain about something that you do then there is less or no risk involved. There is more risk when there is uncertainty about a particular outcome and you still go for it.

risk-takers are more likely to accept jobs with a high degree of risk, the compensating wage

As individuals, we make decisions throughout the day weighing the cause and effect, cost and benefit, risk and impact of our actions on ourselves and upon others. When taken to a larger scale, as the manager of a team, the CEO of a corporation, or the leader of a nation, the decisions exponentially increase in impact and importance.