13 Uncertainty and Risk Aversion

This video introduces the concept of uncertainty in economics, starting a new series on the topic. We will explore what creates uncertainty and delve into risk aversion, a key assumption in understanding economic choices under uncertainty. By the end of this lesson, you'll grasp the meaning of an expected utility maximizer and understand what it truly signifies to be risk averse. To analyze uncertain situations, economists often assume individuals are expected utility maximizers. This means they make decisions based on the weighted average of the utilities they expect to receive from different possible outcomes. This assumption is crucial for modeling economic behavior when the future is not guaranteed. Furthermore, this video clarifies the often misunderstood definition of risk aversion. A risk-averse individual strictly prefers the certain expected value of a lottery over the lottery itself, even if the lottery might offer a higher potential payout in some scenarios. This preference for certainty has practical implications, such as why risk-averse individuals might avoid casinos or prefer a stable salary over freelance work with fluctuating income. Subscribe to @AxiomTutoringCourses for more economics tutorials.