Economics of uncertainty
Importance of Economics of uncertainty-
The economics of uncertainty is the study of that economic condition where there is uncertainty but all the players in the economy has the same information. The importance of economics of uncertainty can be easily understood through a scenario, when a person buys insurance policy for a flight is because he in uncertain if the plane will crash. The buying of the insurance policy transfer some of that risk to the insurance company, which is also uncertain about the plane crashes and the amount the insurance will losses. In this case both the insurance policy buyer and the insurance company face the same uncertainty about the plane crashes or not, they have the same level of information. The economics of uncertainty help the insurance company the amount of premium they will charge the buyer and the maximum amount of premium the buyer will pay for the insurance policy. The economics of uncertainty is important of because of the following reasons which are as follows-
- It is important in finance because most financial instruments have uncertain returns, and traders have different information about these returns. Similarly like insurance policy most financial instruments serve the role of risk sharing.
- In the labor economics as the employers are uncertain about the abilities of the employees.
- It is important in industrial Expertsminds.com as the consumers are uncertain about the products and their cost structure.
The economics of uncertainty is the lack of information which is when you don't know something about the world like the consequences of your actions. Many of the industries are based on the economics of uncertainty like insurance industry, finance industry etc.
Difficulties faced by a student while solving Economics of uncertainty problem-
In the economics of uncertainty the problem faced by the students is the problem of decision making, in the case of uncertainty the person is unaware about the returns. For example, in the insurance sector the policyholder is uncertain about his future life so he takes a life insurance policy or a health insurance policy to have a certain returns in the case of any unfortunate events. Then the problem is how to decide the premium to be charged from the policy holder and the maximum amount of premium that he will be willing to pay, therefore deciding the price for a certain outcomes in the case of uncertainty is one of the major problem faced by the students.
Similarly in the financial industry the market players are uncertain about how the market is going to behave in the future so they use different kinds of approach to decrease the impact of uncertainty for example- hedging, it is one of the most common method used by the financial mangers to minimize the risk from an uncertain market by choosing a portfolio of different investments project with different rate of risk.
Few important tips to solve problems of Economics of uncertainty-
One of the important theories which can help student in dealing with the problems related to economics of uncertainty is the decision theory approach. The decision theory has two goals-
1. To describe how agents do make decisions.
2. To prescribe how agents should make decisions.
There is one another branch of the decision theory other than descriptive and prescriptive theories which is normative decision theory approach which tells how a hypothetical, intelligent human being will make decisions. Decision theory approach will help students because it balances accuracy and simplicity. Most of the assumptions in decision theory are base on the normative approach because it is simpler to understand than descriptive and prescriptive approach.
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