INTRODUCTION

1. Uncertainty.

1.1. First-price sealed-bid auction.

A kind of auction.
Rules: the owner decides to sell an invisible goods. The buyers offer bids.
Follow the example in the slides.
There’s a reservation price  maximum price willing to pay.
The reservation price of 1 is known by both but the one of 2 is only known by himself. Then, there’s a risk
for player one
Complete with what’s in the slide

There’re two main solutions  p= 200 / p=200 and v =600/v=200

The expected monetary value of a lottery is the sum of all

EV=(p=200)= (1/2)*0+(1/2)*800
EV(p=600) =

If we decided to chose by the expected value, we’d chose any because it’s totally the sam. However, most
of use doesn’t chose by the expected value method but by the level of risk.
Risk has a direct realation to variability.

1.1. Preferences towards risk.

People has different preferences towards risk: risk lover, risk averse, risk neutral.
- Certainty equivalent of a lottery (l) the amount of certain money that you are indifferent between this
amonunt of money and the lottery (risk).
- Risk neutral. C(i)=EV(i).
- Risk lover c(i)> EV(i).
- Risk adverse c(i)< EV (i). people prefer this option