Last Chance Study Guide Very Key Information I took the Test 10 27 14 RMI2302 Everything on this Study Guide will be on the Test GOOD LUCK Module 5 Nondurable Goods products that have lives less than 3 years Example food clothing and gasoline a The correction of a positive externality i Subsidize consumers example student loans ii Subsidize suppliers example funding immunization iii Provide goods via government government finances or owns operates the industry that is involved when positive externalities are extremely large 1 Unemployment occurs when private sector spending is too low common actions taken are an increase in government spending or lowering taxes People must be eligible willing and able to work in order to be considered unemployed The government can lower unemployment by a b Implement Public Service Projects to give people jobs Incentivize Private Sector to hire people Balancing Liberty and the Pursuit of Well Being The free market puts us in a position to harm ourselves Humans are not always rational The free market fails to protect consumer interests requiring the government to find appropriate ways to protect us from ourselves Government is balancing competing goals freedom happiness health education etc There is no simple solution Maximization Begins with Measurement Politicians to design Happiness Liberty Freedom capabilities all of the above Competing objectives Freedom Happiness Health Education Problem we don t have a very good model of how governments make decisions Political models often incorporate heavy discounting Q Molly goes to the grocery store and spends 75 on food According to The US Economy Private and Public Sectors which of the following describes her purchase A Non durable Good Module 6 Risk Reward Understand the relationship between risk reward Basis of Insurance People are willing to pay to avoid risk Individuals Measure risk with expected Utility Organizations Measure Risk with EXPECTED VALUE CAPM AND OPPORTUNITY COST cost of capitol Cost of Capital aka Opportunity cost can be utilized by organizations through discounting When you compare the value of investing a dollar today to the value of a dollar in the future you must discount or bring that future dollar back to a value today The higher the opportunity cost or cost of capital the larger the future value needs to be to get them to invest Discount Rate Increases with political decisions because people in politics only look in the short term to get re elected not the long term CAPM Relates only to Systemic Risk Efficient Frontier a graph that shows the tradeoff between risk and reward The Efficient Frontier line represents the optimal combination of risk and return Each dot represents a portfolio The dots that are closest to the Efficient Frontier line are the portfolios that are expected to show the best performance with the smallest risk Bias a subjective view probability that alters the decision making process Types of Bias 1 Age biases people in certain age groups tend to interpret information about risk differently 2 Cultural biases certain culture view of risk differ example religion biases 3 Experience biases people who have experienced a low probability high consequence event tend to overestimate its likelihood people who have not experienced one tend to underestimate example control biases 4 Gender biases these are not systematic you cannot say all men or all women think a certain way 5 Media biases risks that garner a lot of media attention murder terrorism kidnapping etc are typically overestimated while other risks car accidents health risks tend to be underestimated High frequency low severity are overestimated Low frequency high severity are underestimated Incentives these are how we get people to make decisions that are advantageous to us Types of Incentives 1 Financial aka remunerative most incentives take on a financial form These exist when an agent can expect some form of material reward in exchange for acting in a particular way 2 Moral convinces someone to do the right thing These exist where a particular choice is widely regarded as the proper thing to do An individual acting on this incentive can expect a benefit of self esteem and approval from the community An individual disregarding this incentive can expect a sense of guilt and condemnation from the community 3 Natural curiosity fear anger pain joy pursuit of happiness 4 Coercive using negative reinforcement These exit when a person expects that the failure to act in a particular way will result in a physical force being used against them by others in the community punishment imprisonment requirements destruction blackmail 5 Personal motivate an individual through their tastes desires and the ambition to achieve remarkable feats The understanding of why a specific person acts the way that they do 6 Social takes into account the situation faced by any individual in a given position within a given society by taking into account practices rules and societal norms 7 Political Incentives effect the Short Term Planning which is the opposite of what we want our government to do We want them to think Long Term Because politicians focus on the short term they are more inclined to raise the Discount Rate because to them today s money is more important than the opportunity cost of the future The Study of Economics is basically a study of incentive systems The Law of Unintended Consequences outcomes that are not the ones intended by a purposeful action There is no way to create an incentive system and truly understand how every single person is going to use or abuse it I cannot predict behavior as a whole There will always be mistakes and people will always try to find ways to game the system Q When organizations and politicians have higher risk what do they do to the discount rate A The discount rates are increased Q What motivates an individual to make or perform an action A incentive Q Individuals and organizations measure risk return with expected utility A False Q People who have experienced a low probability and high consequences event tend to overestimate its likelihood What type of bias does this describe A Experience bias Q Political incentives often do what to the discount rate A increase the discount rate Module 7 Individual Risk Management There are a lot of ways categories of looking at risk at the individual level 1 Property 2 Liability threat of being sued for money 3 Life Premature Death Long Life 4 Health
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