291 information test 2

random variable

A function that assigns numerical values to the outcomes of an experiment, denoted by uppercase letters (e.g., X )

risk neutral

Consumers that are indifferent to risk. They always choose the option with the largest expected value, regardless of its risk

Risk Averse:

If a number of options have similar expected values, they choose the one with the lowest risk, SD(X). If there is only 1 choice, then it should have a positive expected value and little risk

Two key properties of discrete probability distributions:

The probability of each value x is a value between 0 and 1. 0<_ p( X=x)<_1 2. The sum of the probabilities equals 1. ∑P(X = xi ) =1

risk loving

They will choose an option with negative expected value if one of its possible outcomes is large, but risky.

discrete

assume a countable number

Continuous

can be any of an infinite number of possible values within any interval.

Bernoulli process

consists of a series of n independent and identical trials of an experiment.

binomial random variable

is the number of successes in n trials of a Bernoulli process.

Two parameters are required to specify the binomial probability distribution:

n = the number of trials p = the probability of a success on any one trial

( BP) There are only two possible outcomes on each trial:

p = probability of a success 1−p = probability of a failure

uniform distribution

probability are all the same