Risk aversion and heuristics
1: Group A (McDonald’s, Visa, Amazon, Target, and Coca- Cola). Amazon is one of the largest online firms that make net profits of up to 11.59 billion dollars. Furthermore, the revenues on amazon amount to 28.5 billion dollars. Visa earns profits of over 10.3 billion US dollars and revenue amounting to 20.61 billion US dollars. McDonald’s ears profits amounting to US$ 5.9 billion, with revenues of over US$ 21.0 billion. The beverage manufacture Coca-Cola makes revenues of $ 35.4 billion according to the 2019 annual report.
Group B (BerkshirenHathaway, General Electric, Valero, MCkesson, Hewlett- Packard). Berkshire Hataway is an American holding company earning revenues of US$ 247.5 billion with net profis of $4.02 billion. General electric which is ranked as one of the fastest developing industries in the US earns profits of $22.3 billion and revenues amounting to $ 121.6. Valero an energy company makes annual revenue of $108.3 billion and profits summing to $27. 8 yearly. Hewlett-Packard a computer company makes annual profits of US$48.23 billion with profits amounting to US$11.8 billion. The evidence above shows that the companies in group B make more profits and revenues as compare to group A with over 50%.
2: Representative Heuristic is a member of the heuristics where decision are making on probability of events is done under uncertain circumstances. Generally, heuristics short cots in decision making that give us satisfaction on the decisions we make without considering further consequences. However, through use of effort-reduction, heuristics reduce and simplify the decision making process. Relying on representative heuristics is wrong since people tend to make decisions on how something is more representative or likely to be than the actual fact of the matter. The reason why representative heuristic is because people over use it in decision making hence making the biased or wrong in their decision. In the question most students are likely to pick Chinese student as their answer but the correct answer is a psychology student. Because of representative heuristics, many student assume that the Chinese student is likely to be small and shy while it is the psychology student.
3: An estimated 27,600 people in the Unites States more of them being men have been diagnosed with stomach cancer yearly. The most venerable people are old people above the age of 64 years with 60% 0f the cases recorded are from the old people. If the cancer is known before it spreads to other parts survival rate is very low however if it diagnosed when it’s only in the stomach survival rate is more than 61%. Yearly an approximate of 1.35 million people perish from road accidents making an average of 3700 deaths per day. Additionally over 30 million people suffer from fatal injuries that live long lasting emotional and physical scars. In the United States an estimate of 38,000 people lost their lives in road accidents. Comparing with its neighbor’s Canada and Australia use has a 50% higher death rate in accidents. Statistically it is true to say that road accidents cause more deaths than stomach cancer in the United States.
4: Risk aversion is an economic term referring to a consumer’s behavior when faced with uncertainty. It is a very confusing situation for a consumer since a decision has to be mad whether to take a known pay off or continue to get a predictable pay off with greater reward and great risk. In a situation where a person is given a choice of $50 or asked to gamble and get $200, most people would go for the sure $50. So in our case am likely to take ths sure gains of $240.
Reference
Rabin, Matihew. “Risk aversion and expected-utility theory: A calibration theorem.” Handbook of the fundamentals of financial decision making: Part I. 2013. 241-252.
Zheng, Kai, et al. “An enhancement for heuristic attribute reduction algorithm in rough set.” Expert Systems with Applications 41.15 (2014): 6748-6754.