Question 1

Mathematically, the more-is-better assumption is called the rationality assumption.

Accepted Answer

A) True 
 B)False  False

Question 2

A risk-averse person will always hedge the risk completely at a cost that equals the expected loss.This cost is the _____.

Accepted Answer

actuarially fair premium

Question 3

A store owner may not be available to monitor the manager' actions continuously and at all times.This inability to observe actions falls under the class of problems called:

Accepted Answer

A) the principle-agent problem. 
B) adverse selection. 
C) the conflict of interest. 
D) the false consensus problem. 
E) fundamental attribution error. 
A) the principle-agent problem. 
B) adverse selection. 
C) the conflict of interest. 
D) the false consensus problem. 
E) fundamental attribution error. A

Question 4

The risk averter's utility function is concave to the origin.

Accepted Answer

A) True 
 B)False

Question 5

In the utility function of a risk-averse individual, the utility is always increasing although at a decreasing rate.Identify the feature of this utility function.

Accepted Answer

A) Diminishing ordinal utility 
B) Diminishing expected utility 
C) Diminishing normative utility 
D) Diminishing marginal utility 
E) Diminishing cardinal utility 
A) Diminishing ordinal utility 
B) Diminishing expected utility 
C) Diminishing normative utility 
D) Diminishing marginal utility 
E) Diminishing cardinal utility

Question 6

Economists say that the value function is risk seeking in _____ and risk averse in _____.

Accepted Answer

The answer of Economists say that the value function is...

Question 7

Expected utility refers to a construct used to explain the level of satisfaction a person gets when faced with uncertain choices.

Accepted Answer

A) True 
 B)False

Question 8

Unregulated companies are found to hedge more than regulated ones.

Accepted Answer

A) True 
 B)False

Question 9

Humans tend to give more weight to events of the recent past than to look at the entire history.Which of the following best explains this bias?

Accepted Answer

A) Anchoring bias 
B) Attributional bias 
C) Availability bias 
D) Experience bias 
E) Conformation bias 
A) Anchoring bias 
B) Attributional bias 
C) Availability bias 
D) Experience bias 
E) Conformation bias

Question 10

According to the utility theory, the _____ assumption is called the "convexity" assumption on preferences.

Accepted Answer

The answer of According to the utility theory, the _____...

Question 11

_____ theory dictates that people should behave in the manner prescribed by it.

Accepted Answer

The answer of _____ theory dictates that people should behave...

Question 12

Adverse selection refers to a particular kind of information asymmetry problem, namely, hidden information.

Accepted Answer

A) True 
 B)False

Question 13

Studying behavior using subjective probabilities belongs to the realm of traditional rationality-based economics.

Accepted Answer

A) True 
 B)False

Question 14

Corporations are risk neutral because only the systematic risk matters; they can diversify the idiosyncratic risk.

Accepted Answer

A) True 
 B)False

Question 15

Identify the coding of alternatives that makes individuals vary from E(U) maximizing behavior.

Accepted Answer

A) Framing effect 
B) Self-serving bias 
C) Fundamental attribution error 
D) Spacing effect 
E) Availability bias 
A) Framing effect 
B) Self-serving bias 
C) Fundamental attribution error 
D) Spacing effect 
E) Availability bias

Question 16

Identify the correct statement about a fair game.

Accepted Answer

A) It is a game in which the cost of playing the game is less than the expected winnings of the game. 
B) It is a game in which the net value equals zero. 
C) It is a game in which the probability of winning or losing is equal to 1. 
D) It is a game in which the net value is positive and greater than zero. 
E) It is a game in which the cost of playing the game is greater than the expected winnings of the game. 
A) It is a game in which the cost of playing the game is less than the expected winnings of the game. 
B) It is a game in which the net value equals zero. 
C) It is a game in which the probability of winning or losing is equal to 1. 
D) It is a game in which the net value is positive and greater than zero. 
E) It is a game in which the cost of playing the game is greater than the expected winnings of the game.

Question 17

If the probability of a large outcome is very high then the expected value will also be high, and vice versa.

Accepted Answer

A) True 
 B)False

Question 18

Often individuals base their subjective assessments of outcomes based on an initial "guesstimate." Such a guess may not have any reasonable relationship to the outcomes being studied.Identify this bias.

Accepted Answer

A) Self-serving bias 
B) Attributional bias 
C) Availability bias 
D) Experience bias 
E) Anchoring bias 
A) Self-serving bias 
B) Attributional bias 
C) Availability bias 
D) Experience bias 
E) Anchoring bias

Question 19

Regulated companies are found to hedge more than unregulated ones because:

Accepted Answer

A) regulated companies face more risk. 
B) hedging can increase debt capacity. 
C) unregulated companies face more risk. 
D) unregulated companies are prohibited from hedging. 
E) law limits the level of risk taking. 
A) regulated companies face more risk. 
B) hedging can increase debt capacity. 
C) unregulated companies face more risk. 
D) unregulated companies are prohibited from hedging. 
E) law limits the level of risk taking.

Question 20

Anchoring bias has the effect of biasing the probability estimates of individuals.

Accepted Answer

A) True 
 B)False

Exam 3: Risk Attitudes: Expected Utility Theory and Demand for Hedging

Mathematically, the more-is-better assumption is called the rationality assumption.

A risk-averse person will always hedge the risk completely at a cost that equals the expected loss.This cost is the _____.

A store owner may not be available to monitor the manager' actions continuously and at all times.This inability to observe actions falls under the class of problems called:

The risk averter's utility function is concave to the origin.

In the utility function of a risk-averse individual, the utility is always increasing although at a decreasing rate.Identify the feature of this utility function.

Economists say that the value function is risk seeking in _____ and risk averse in _____.

Expected utility refers to a construct used to explain the level of satisfaction a person gets when faced with uncertain choices.

Unregulated companies are found to hedge more than regulated ones.

Humans tend to give more weight to events of the recent past than to look at the entire history.Which of the following best explains this bias?

According to the utility theory, the _____ assumption is called the "convexity" assumption on preferences.

_____ theory dictates that people should behave in the manner prescribed by it.

Adverse selection refers to a particular kind of information asymmetry problem, namely, hidden information.

Studying behavior using subjective probabilities belongs to the realm of traditional rationality-based economics.

Corporations are risk neutral because only the systematic risk matters; they can diversify the idiosyncratic risk.

Identify the coding of alternatives that makes individuals vary from E(U) maximizing behavior.

Identify the correct statement about a fair game.

If the probability of a large outcome is very high then the expected value will also be high, and vice versa.

Often individuals base their subjective assessments of outcomes based on an initial "guesstimate." Such a guess may not have any reasonable relationship to the outcomes being studied.Identify this bias.

Regulated companies are found to hedge more than unregulated ones because:

Anchoring bias has the effect of biasing the probability estimates of individuals.

The Nature of Risk: Losses and Opportunities

Risk Measurement and Metrics

Evolving Risk Management: Fundamental Tools

The Evolution of Risk Management: Enterprise Risk Management

The Insurance Solution and Institutions

Insurance Operations

Insurance Markets and Regulation

Fundamental Doctrines Affecting Insurance Contracts

Structure and Analysis of Insurance Contracts

Property Risk Management

The Liability Risk Management

Multirisk Management Contracts: Homeowners

Multirisk Management Contracts: Auto

Multirisk Management Contracts: Business

Risks Related to the Job: Workers Compensation and Unemployment Compensation

Life Cycle Financial Risks

Social Security

Mortality Risk Management: Individual Life Insurance and Group Life Insurance

Employment-Based Risk Management General

Employment-Based and Individual Longevity Risk Management

Employment and Individual Health Risk Management

Filters

Economists say that the value function is risk seeking in _ and risk averse in _.