BØA3100 Insurance, Finance and Behavioral Economics

Learning Outcome

Knowledge

Upon completion of the course, the student should have knowledge of:

• The concept of utility and the assumptions underlying the expected utility theory
• How the expected utility theory can be used to explain different attitudes towards risk, including risk aversion, risk neutrality, and risk seeking
• Various methods that can be used to quantify and rank risk
• How the expected utility theory can explain the demand for insurance
• Risk sharing between actors, such as between the provider and the demander of insurance
• Various insurance contracts
• Portfolio selection and optimal allocation of capital for agents with different attitudes towards risk
• The weaknesses of the expected utility theory and its assumptions
• Behavioral economics: some central alternative models to the expected utility theory
• How modified assumptions can explain economic events that cannot be predicted from the expected utility theory and the consequences this has for issues such as resource allocation or price setting

Skills

Upon completion of the course, the student should be able to:

• Use the expected utility theory to justify different attitudes towards risk
• Calculate risk measures such as risk premium and safety equivalent in examples with simple utility functions
• Calculate expected return and risk measures
• Calculate expected utility for decision problems such as choosing between different lotteries, different insurance contracts, or different compositions of financial portfolios
• Rank stochastic variables based on expected utility
• Discuss the weaknesses of the expected utility theory and be familiar with central behavioral economics models
• Understand and describe modified assumptions about behavior and explain how these altered assumptions affect economic outcomes

General competence

Upon completion of the course, the student should:

• Have an in-depth understanding of the concept of utility
• Understand different risk measures and how risk affects a decision
• Understand the difference between different insurance contracts and be able to argue for insurance choices
• Use relevant decision models to solve tasks
• Be familiar with alternative decision models that can be used when certain assumptions are not met
• Be familiar with central alternatives to the assumption of rational behavior of economic actors and be able to critically evaluate what this means for the decisions the actors make
• Use insights from behavioral economics to critically evaluate economic claims.

Entry requirements

None

Recommended previous knowledge

Investering og Finansiering (BØA204), Matematikk for økonomer (BØA111), Statistikk for økonomer (BØA115), Mikroøkonomi 1 (BØA203), or equivalent.

This course uses analytical models to study decision-making under uncertainty. The course is therefore best suited for students whom are comfortable with analytical approaches. Simple mathematics and statistics are used to illustrate concepts graphically, with technical calculations kept at a relatively simple level. Necessary math knowledge will be reviewed during the course.

Teaching methods

Lectures with review of theory and problem-solving sessions.

Compulsory learning activities

Up to two assignments to be solved individually or in groups.

Assessment

Written school exam, 4 hours.

Grade: A-F

Examination support material

Calculator and provided formula sheet.

More about examination support material