Regulation, Innovation, Excess

Regulation, Innovation, Excess
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The Economics of Uncertainty Series
Learn to cope with uncertainty and risk with advice from a master economist. Economic uncertainty is like the weather: you can't stop storms, but understanding them prepares you. Uncertainty is beyond our control, but when you take the mystery and dread out of uncertainty, you can respond much more effectively.…
Man, Nature, and Economic Uncertainty
Professor Fullenkamp begins with "black swan" events--occurrences that are considered as improbable as black swans. A notable recent example is the 2008 financial crisis. This leads to an examination of the nature of uncertainty and the best strategy for dealing with it.
Turning Uncertainty into Risk
When faced with an uncertain situation, try turning it into a "risky" situation. Risk is probability. Knowledge is power. This may sound counterintuitive, but it's a surprisingly effective approach, pioneered by University of Chicago economist Frank Knight. See where it applies and does not apply in economic settings.
Five Ways to Face the Unknown
In dealing with uncertainty, it makes sense to have an arsenal of different strategies. Explore five techniques for risk management that can be used in every sphere of life: producing information, diversifying, sharing risk, avoiding risk, and absorbing risk. Probe instructive examples of each.
Probability: Frequency or Belief?
Examine two different types of probability. Frequency-based probabilities rely on many examples of a phenomenon, while subjective probabilities call on personal experience and judgment, often drawing on relatively few cases. Learn to think critically about these two approaches, and know when to use them.
How We Misjudge Likelihood and Risk
Improve your ability to handle uncertainty by studying two ways that people reach decisions. System 1 excels at making snap judgments, while System 2 is analytical, methodical, and more time-consuming. Weigh the strengths and weaknesses of each, focusing on the problem of estimating probabilities.
The Reward in Risk
Having learned to convert uncertainty to risk in Lecture 2, now go deeper by investigating how probabilities can gauge rewards and risks. Test risk-assessing tools used in finance, including expected value, variance, standard deviation, coefficient of variation, Sharpe ratio, covariance, and beta.
Decision Science Tools
When is a risky project worth doing? Learn how corporate managers decide whether they should undertake a new enterprise. Discover that simple graphic aids, such as scenario analysis and decision trees, are powerful tools for weighing risk in both business and daily life.
Gambling Economics
Gambling makes some people nervous, but it gives valuable insight into any type of risk-taking activity, including investing and entrepreneurship. Explore the role of games of skill and chance in the economy, and apply their lessons to activities such as banking and retirement planning.
Game Theory: Reveal or Conceal?
Use game theory to shed light on strategic interactions, which are competitive transactions involving people or organizations. Such interactions can range from negotiating the sale of a house to pricing products for maximum sales. As an example, analyze an intriguing competition between two potato chip brands.
Adverse Selection: Hiding in Plain Sight
Adverse selection occurs when the lack of information by one party leads to a distorted result. See how this situation surfaces in many different contexts, from used car sales to investment deals to Internet purchases. Learn to recognize the adverse selection trap, and know how to correct it.
Moral Hazard: Whom Do You Trust?
Examine another outcome of asymmetric information: the moral hazard problem. This peril arose spectacularly in the 2008 financial crisis, with the widespread sale of bad loans to unwitting investors. But it also lurks in many small-scale transactions. Discover what you can do to combat it.