43 Pages Posted: 16 May 2007
Date Written: October 20, 2003
This is a course material from the book Managerial Decision Making Under Risk and Uncertainty. The book is originally in Spanish and is untitled as Decisiones empresariales bajo riesgo e incertidumbre. The level of the book is basic. We use very few mathematics and it is expected to be used by managers.
In this fifth chapter we deal with the attitudes toward risk. We present the classical cardinal utility theory and illustrate the three well know cases of attitudes toward risk: averse toward risk, indifferent toward risk and propense toward risk. We also present the concept of certainty equivalent. We mention the limitations of the cardinal utility theory. We include a short reference to the prospect theory by Kahneman and Tversky. We illustrate the concept of risk aversion with a real life lottery example.
Notes: Downloadable document is in Spanish
Keywords: Risk, risk attitudes, cardinal utility theory, risk aversion, risk propension, risk indifference
JEL Classification: G31
Suggested Citation: Suggested Citation