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RMI Exam #2

Terms in this set (75)

Employers want employees who
Can make critical decisions
Individuals
-Measure risk/reward using expected utility
-How much reward is necessary to get the individual to take the risk?
Risk/Reward for Organizations
-Use expected value
-No natural risk aversion
-Opportunity Cost
-Project future cash flows from investments/opportunities
-Cost of capital is commensurate with riskiness of firm
CAPM
-Only reward systemic risk
-Not diversifiable risk
Risk/Reward for Gov't/Society
-Measuring reward is difficult
-Many times government is the only entity able to take on risk, regardless of reward
What is a bias?
-Subjective view/probability
-Alter decision making
Donald Rumsfeld
-The unknown unknowns are the most dangerous
Types of Bias
-Age biases
-Cultural biases
-Experience biases
-Gender biases
-Media biases
Incentives
-Things that motivate individuals to perform an action
-Can be at the individual level, organizational level, or societal level
Types of Incentives
-Financial (most incentives)
-Moral
-Natural
-Coercive
-Personal vs. social
Moral Incentives
"Do the right thing"
Natural Incentives
"curiosity, fear, anger, pain, joy, pursuit of happiness"
Coercive Incentives
Negative reinforcement
-remove something unpleasant
Political Incentives
-short term vs. long term planning
-Discount rate
Study of Economics
-Study of incentive systems
-Beware of "The Law of Unintended Consequences"
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