Chapter(22:(Frontiers(of(Microeconomics4(Uncertainty(&(Information(Asymmetry((Uncertainty:(4 expected'value4(expected(average(value(of(an(event(if(it(is(repeated(many(times;(calculated(by(taking(every(outcome(and(adding(the(probabilities(together(Dice:(Die'Number''Payoff'Probability'Payoff'x'Probility'1(1(1/6(1/6(2(44(1/6(44/6(3(9(1/6(9/6(4(416(1/6(416/6(5(25(1/6(25/6(6(436(1/6(436/6(((Expected'Value'826/6'(Insurance:(4 fair'insurance4(expected(value(of(the(claims(of(the(company(will(have(to(pay(is(exactly(equal(to(the(premiums(they(will(collect(4 risk'averse4(person(prefers(a(less(risky(situation,(holding(fixed(its(expected(value(4 risk'neutral4(care(only(about(expected(value;(indifferent(to(alternatives(4 SHOULD(buy(if:(o Loss(is(loss(compared(to(income(o Insurance(is(only(a(little(unfair(o You(are(risk(averse(4 SHOULD(NOT(buy(if:(o Loss(is(small(compared(to(income(o Insurance(is(very(unfair(o You(are(a(little(risk(averse(Ex.(( House(is(worth($40k,(Equity(is(worth($30k(=(Va lue(is($70k(( 10%(chance(of(a(fire(costing($30k(damage(( Insurance(is(a($3k(premium((( Expected(value:(( w/o(insurance((90%(of(No(Fire(x($70k)(+((10%(of(Fire(x($40k)(=($67k(( ( ( ( w/(insurance((($70k(4($3(premium(=($67k(((Investments:(4 one(method(to(reduce(risk(is(to(diversify(your(portfolio((((((((((((((Asymmetric(Information:(4 asymmetric'information4(one(side(of(an(economic(relationship(has(more(information(than(another(4 hidden'characteristics4(known(only(to(one(side(of(the(transaction((used(cars,(insurance)(4 hidden'actions4(actions(taken(by(one(side(of(an(economic(relationship((real(estate(agents,(doctors(prescribing(extra(tests)(4 adverse'selection4(tendency(for(the(mix(of(unobserved(attributes(to(become(undesirable(from(the(standpoint(of(an(uninformed(party((buyer(isn’t(sure(if(car(is(plum(or(lemon,(so(does(not(buy)(4 screening4(action(taken(by(uninformed(party(to(induce(informed(party(to(reveal(information(4 signaling4(action(taken(by(informed(party(to(reveal(information(to(uninformed(party((warranty)(4 moral'hazard4(tendency(of(a(person(who(is(imperfectly(monitored(to(engage(in(dishonest(behavior(4 agent4(person(who(is(performing(an(act(for(another(person(4
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