Master Class Notes from a Financial Decision Course
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Financial Decision Making 2 BEE 3034 Spring 2014 Rajiv Sarin March 28, 2014 1 Introduction and Course Outline 1. Thi s is a cour se in Finan cia l Decis ion Ma kin g. To best ach iev e the objectives of this course, our approach shall be to …rst clearly under- stand “dec ision making.” The setting of decisi on makin g will be when an action results in an uncertain outcome. 1 What is “rational choice” in this settin g. And, is such ch oice also (t ypica lly) obs erv ed. 2. Once we ha ve mastered decisio n theor y , we shall apply it to a v ariety of …nanci al frames. W e shall cov er a number of these. 2 3. Y ou are alre ady presumed to be fami liar with cho ice under certa inty (i.e., when there is no risk and each action yields a speci…c outcome and tha t outcome only in every stat e of the world). Y ou hav e seen this in consumer theory and when we discuss preferences and utility. 4. While no single book will be adequate for this course, the closest thing we have to a text, which will be worth buying, is “The Microeconomics of Risk and Information,” by Richard Watt (Palgrave McMillan ISBN 1 That is, for example, you get a di¤erent outcome (£1) if it comes up heads and you get a di¤erent outcome (-£1) if it come up tails, but you don’t know when you make the dec isi on if it will come up heads or tai ls. Or, for example , yo u mi ght get a di¤ ere nt outcomes (+£1, -£1) with di¤erent probabilities (0.5, 0.5). 2 For details, see the (online) full module speci…cation. 1
