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English B2 level. Microeconomics. Theory of Consumer. Utility. Preference curves. Preference axioms and the theory of choice. The meaning of Rationality in Economics
The main objective of the course is to introduce students to the concept of risk and to explain how uncertainty modifies the choices of individuals and societies. At the end of the course, the students will be able to distinguish between risk lover, risk neutral and risk adverse attitudes in the different theories of risk.
The course will present the evolution of the theory of risk from the notion of expected value to the concept of expected utility. A great attention will be given to the prospect theory and to alternatives approach to risk management, such as the relational theory.
Syllabus:
Introduction : the definitions of risk and probabilities
The expected value theory
- The introduction of uncertainty into the choice problem
- Risk neutral, risk lover and risk adverse agents in the expected value framework
- The St. Petersburg paradox
The expected utility theory:
- The axioms of the expected utility theory
- Completeness
- Transitivity
- Continuity
- Independence
- The Allain paradox
The prospect theory:
- The prospects problem
- The value function
- The framing phase
- The evaluation phase
Modalités
The course uses a mixed method of frontal lessons, experiments, games, and group’s works. The students will be solicited to take part in the lessons by providing their opinions on the paradox of risk theory, by betting on risky lotteries and by discussing their preference in terms of risk attitudes.
The notes will depend on the active participation of students in the lectures. Many different activities will give to students the possibility to gain additional points for the final note. 50% of the final note will come from the mid-term written exam. The remaining 50% will come from the final exam, which will take the form of a group presentation.
Ressources
Boholm, Å., & Corvellec, H. (2011). “A relational theory of risk”, <i>Journal of Risk Research</i>, 14(2), 175-190.|| Kahneman, D., & Tversky, A. (2013). “Prospect theory: An analysis of decision under risk” in <i>Handbook of the fundamentals of financial decision making: Part I </i>(pp. 99-127).|| Mongin, P. (1997). “Expected utility theory”, <i>Handbook of economic methodology</i>, 342350.