Expected Utility and Insurance
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- Опубликовано: 13 окт 2024
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This video deserves more views. Thanks for the simple explanation
I finally understand thank you. Very slow and detailed explanation was perfect.
How do you calculate your utilities if U = √(w) is not given to you?
I"m not sure what you are asking. You have to be given a utility function to do the calculation. You also need to know how much wealth you have in each situation.
@@RonaldMoy I was doing a long question, where I had a utility function for the optimal basket of good x and good y and in one of the follow-up questions, I was asked to calculate the expected utility of someone without insurance. I was only given the probability of someone getting injured and the probability of someone staying healthy and the income levels associated with both scenarios. I wasn't provided U(I)=something. This is where my troubles began.
I was stuck on that question for so many days because I wasn't provided with utility function based on income or wealth. But at last, it was figured that if I calculate the utility of household without insurance using the utility of the optimal basket and multiply these utilities with both probabilities, I would get the expected utility of people without insurance.
The formula I used was something along the lines:
EU (without insurance) = utility derived from optimal basket of no accident × pr of no accident + utility derived from optimal basket of accident × pr of accident
Usually in my classes we did,
EU (without insurance) = pr1 × utility function of Income 1 + pr2 × utility function of income 2
I didn't know if the method I used was the correct method and I couldn't wait for my tutor's feedback so I started watching random videos about the topic. Until I landed in your channel, which btw did fantastic job at explaining the overall topic.
This is also why I asked the question out of curiosity without any context because in my head it was too mouthful to explain. 😅
Also it would have been better if my uni taught the topics in conjunction and not separately. They just somehow expect me to have an epiphany and connect dots that I am not fully aware whether they exist or not in the first place. Like who would think that optimal basket had anything to do with risk and uncertainty? They should at least give some hints because if I miscalculate one question, my answers for the next questions are all wrong. Do you know what I mean?