1. Decision Making Under Uncertainty: The Tools
1.1. 1) Expected Value (EV)
1.1.1. Sum of the payoffs associated with each possible outcome of a situation weighted by its probability of occuring
1.2. 2) Expected Utility (EU)
1.2.1. Sum of the utilities coming from all possible outcomes of a deal weighted by the probability of each occuring
1.3. 3) Attitudes Toward Risk
1.3.1. Risk-Averse
1.3.1.1. a person's preference of a certain payoff over an uncertain one with same expected value
1.3.2. Risk-Neutral
1.3.2.1. a person's willingness to take a bet with a zero expected value
1.3.3. Risk-Loving
1.3.3.1. a person's willingness to take a bet with negative expected value
2. Asymmetric Information
2.1. Meaning
2.1.1. One of the parties to a transaction has information relevant to the transaction that the other parties does not have
2.2. Adverse Selections
2.2.1. Adverse selection and Lemons
2.2.2. Adverse selection and Insurance
2.2.3. Reducing adverse selection problems
2.3. Market Signaling
2.3.1. An actions taken by buyers and sellers to communicate quality in a world of uncertainty
2.4. Moral Hazard
2.4.1. Arises when one party to a contract changes behavior in responses to the contract. Thus, passes on the costs of that behavior change to the other party
2.4.2. Solutions
2.4.2.1. Make information less asymmetric
2.4.2.2. Change the incentive