Formation/Cours

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