Decisions under Uncertainty (MA) ## AimsIn finance economic principles are applied to decision making in an uncertain environment which is modelled by means of random variables and probability distributions. We talk about situations under risk. Preferences of decision makers are described by so-called utility functions which leads to the concept of expected utility a rational investor should follow. Expected utility theory is the basis for much of modern finance theory. Traditional finance is a normative theory. However, it is observed that people’s behavior often deviates from this rational decision model. Therefore more descriptive approaches have emerged. The application of such approaches to finance leads to the field of behavioral finance. In the final part of the lecture we will deal with behavioral decision theory and carry out some online experiments. ## Organizational IssuesThe lecture is held in every winter term, 2 hrs per week (4 ECTS).It is held in English and all examinations are in English.
Please note that if you missed the registration for the lecture
Registration is possible during the semester when the lecture is held and the subsequent semester. The lecture "Decisions under Uncertainty" is a compulsory course in the following programs: - Master's program in Banking and Finance
- Core Program: Introductory Module
- Master's program in Applied Economics
- Specialisation in Applied Economics: Elective Module "Banking and Finance"
It is an elective course for the following programs: - Master's program in Economics (expiring)
- General Electives: Business Administration and Finance
- Master's program in Statistics
- Free Electives
## PrerequisitesBasic prior knowledge in statistics and probability theory as well as in calculus and linear algebra are needed.Prior knowledge in microeconomics is an advantage. See also mathematical and statistical ability at the information site on admission requirements for the master's program in Banking and Finance. Recommended literature - H. R. Varian, Intermediate Microeconomics (9th ed.), W. W. Norton & Company, New York, 2014
- Mathematics and statistics: see the Mathematical Appendix of the lecture notes
## Topics- Introduction (what is decision theory, decisions under risk)
- Expected utility theory
- Risk aversion
- Stochastic Dominance and Risk Comparisions
- Some Remarks on the Mean-Variance Approach
- Empirical Facts
- Prospect Theory
- Sequential Decisions and the Role of Information
## ExamsThe lecture is graded by one single exam.Exams are offered at - the end of the winter term,
- the beginning of the summer term,
- during the summer term,
- the end of the summer break
For the exam
Please care about meeting the deadlines for registration and deregistration.
Please note that
(see also Vorgehensweise bei Erschleichung von Leistungen - document by the Studienpräses, only available in German) ## Literature- A. Gaunersdorfer, Decisions under Uncertainty, Lecture Notes, University of Vienna (latest edition)
- T. Biswas, Decision-Making Under Uncertainty, Macmillan Press, Basingstoke, 1997, part I
- T. E. Copeland, J. F. Weston, K. Shastri, Financial Theory and Corporate Policy, Pearson Education, 2005, ch. 3
- A. Mas-Colell, M. D. Whinston, J. R. Green, Microeconomic Theory, Oxford University Press, New York, 1995, ch. 6
- T. Hens and M. O. Rieger, Financial Economics -- A Concise Introduction to Classical and Behavioral Finance, Springer, 2010, ch. 2
- P. P. Wakker, Prospect Theory: For Risk and Ambiguity, Cambridge University Press, New York, 2010
Supplementary reading: - L. Eeckhoudt, C. Gollier, H. Schlesinger, Economic and Financial Decisions under Risk, Princeton University Press, Priceton, ch. 1, 2
- H. Levy, Stochastic Dominance - Investment Decision Making under Uncertainty (3rd ed.), Springer, 2016.
- C. Huang, R. H. Litzenberger, Foundations for Financial Economics, Elsevier Science Publishing Co., New York, 1988, ch. 1, 2, 3.1-3.6
- J.-P. Danthine, J. Donaldson, Intermediate Financial Theory (2nd ed), Elsevier Academic Press, 2005, ch. 3–6
- D. Ruppert, Statistics and Finance – An Introduction, Springer, New York, 2004
- G. Sorger, Entscheidungstheorie bei Unsicherheit, Lucius & Lucius, Stuttgart, 2000
Additional literature will be on the lecture slides. |