# Consumer choice in terms of risk and uncertainty...

## Consumer choice in terms of risk and uncertainty

The subject of this chapter is the behavior of consumers, producers, households, firms and other economic entities in the conditions of risk and uncertainty of the market environment, under conditions of constant changes in the internal and external environment.

As a result of studying this chapter, the student must:

know

• what is risk; the main causes of uncertainty and risk; different types of attitude towards risk; the behavior of the consumer making the choice of utility in conditions of uncertainty; classical decision criteria under uncertainty; the concept of risk aversion;

be able to

perform a comparative analysis of the risk and uncertainty category, identify their characteristics; justify a quantitative risk assessment; to carry out a comparative analysis of the absolute and relative Arrow-Pratt measure of the attitude to risk and to consider their properties; to study the situation of joint risk taking; solve the problem of optimizing the investment portfolio;

own

methods of preventing and reducing risk; methods of estimating the amount of the full compensation by the insurance company of the entrepreneur's losses in the event of an unfavorable situation.

## The concepts of risk and uncertainty

In the modern concept of risk - is the degree of uncertainty of income given (planned) level. For some cases (when known probability of a particular outcome) risky situation can be modeled by formula

where R is a risky event; P - probability of its occurrence; I - the importance of the consequences in the event of a risk event.

Under market conditions, economic decisions can be made in one of three model situations.

1. The conditions of complete certainty are the situation when the result of each of the alternative solutions is known with probability up to 1.

2. Risk conditions - a situation in which the probability of obtaining each of the possible outcomes is known. By probability in this case is understood the degree of possibility of occurrence of the given event (it takes values ​​from 0 to 1, the sum of probabilities of all alternatives should be equal to 1).

3. Uncertainty conditions are a situation in which it is impossible to estimate the probability of potential results.

Any activity in a market economy is inevitably associated with making decisions under the lack of information, ie. in conditions of uncertainty and risk.

In addition to the lack of information, the main causes of uncertainty and risk can be named:

- natural disasters and natural phenomena;

- crashes;

- collisions of conflicting interests of individuals;

- the probabilistic nature of scientific and technological progress;

- the limited resources needed to make and implement decisions;

- an ambiguous understanding of the object by which a decision is to be made;

- the presence of significant differences in the stereotypes of the behavior of individuals;

- the imbalance of the main components of the economic mechanism: planning, pricing, monetary relations, etc.

There is no generally accepted risk classification system in the economic literature. In Table. 3.1 the author's classification of risks is presented.

Table 3.1. Pivot table of risk classifications

 Classification Types of risks in accordance with the classification By Subject • Global, planetary, when the subject is all of humanity (the planet) as a whole; • national, country, regional, when the subject is a nation, a country, individual regions; • the risks of certain groups or structures, such as government agencies, social groups, individuals, • risks of economic, political, social and other systems • risks of various branches of the economy; • risks of economic entities • risks of individual objects (enterprises or projects); • risks of activities; • Other By degree of damage • Partial - planned indicators, actions, results are partially, but without losses; • allowable - planned indicators, actions, results are not met, but there are no losses; • Critical - planned indicators, actions, results are not met, there are certain losses, but integrity is preserved; • catastrophic - failure to fulfill the planned result entails the destruction of the subject (society as a whole, region, country, social group, individual, industry, enterprise, activity, etc.) In the spheres of manifestation, by the nature of the risk • Political, associated with the change in the political course of the country (in particular, military-political); • economic, associated with changes in economic factors (marketing, currency, investment, financial, default risk, etc.); • regulatory and legislative, related to changes in legislation and regulatory framework (legal, contractual); • banking (credit, market (inflation risk), liquidity, operational, etc.); • production and technical (technical and technological, construction, transportation, etc.) • social, associated with social difficulties (for example, the risk of strikes, etc.); • environmental ( natural ), associated with environmental disasters and disasters (for example, risk of force majeure circumstances, in particular flood risk, accident risk at nuclear power plants, etc.); • Information By the degree of communication fluctuations in the return on assets with fluctuations in the return of the stock market (market portfolio of investments) • Non-systematic risk (internal), inherent in a specific economic entity, depending on its condition and determined by its specific specifics (associated with management accounting and financial planning); • The systematic risk (external), associated with market volatility, a risk that is independent of the subject and not regulated by it. It is determined by external circumstances and is the same for the same type of subjects. The systematic risks are subdivided: • for unpredictable regulatory measures in the areas of legislation, pricing, standards, market conditions; • natural disasters and disasters (risks of force majeure circumstances - force majeure); • Political change; • crimes For the type of enterprise activity that is singled out in the business valuation • Operating; • investment (investment risk, selective, temporary, legislative changes, credit, liquidity, etc.); • financial (price, interest, credit, currency (exchange rate), liquidity, solvency, operational, inflation, default risk) By stages (phases) of the object's life cycle • Risks of the phase of creation, development; • the risks of the phase of development, growth; • Risks of maturity; • risks of a stage of decline By time of occurrence • Retrospective; • current; • Perspective If possible, reduce the risk (with diversification of the portfolio of investments) • Diversified; • non-diversifiable (systematic risk can not be diversified) By scale • Global; • country; • Regional; • industry-specific; • corporate (company), project Relative to the organization environment • External (exogenous, macroeconomic); • internal (endogenous, microeconomic) If possible, manage (and reduce) • Managed; • unmanaged If possible, insurance • Insured; • not insurable By the nature of the change • Static (due to the possibility of loss of real assets due to damage to property and loss of income due to the incapacity of the organization); • dynamic (associated with the occurrence of unforeseen changes in fixed capital due to management decisions, as well as market or political circumstances) By Markets • The real estate market; • the securities market; • the investment market; • building, etc. By the nature of the probability distribution • Discrete (distribution) - implies the presence of a finite number of possible outcomes, each of which has its probability of occurrence (the sum of all probabilities is equal to one); • continuous - the result can take any value in a certain interval In probability of risk realization • Homogeneous - risks having approximately the same probability of risk realization (damage occurrence) and the amount of possible damage; • heterogeneous - have a different probability of realizing the risk and the possible amount of damage By the nature of the concept of risk, by the consequences • Speculative - implies the possibility of obtaining both a negative and a positive result; • clean. Such risks involve obtaining only a zero or a negative result

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