ECO440 Economics of Uncertainty: Insurance and Finance
The overall topic of the course is economic and financial decisions under uncertainty and is motivated by challenges facing the insurance and finance industry. The course applies expected utility and explains risk aversion and its behavioral implications. It also describes how to rank risks, how to optimally buy insurance (demand side), and, how to choose between savings and consumption in a multi-period model. A central ingredient in these problems is uncertainty.
The course also deals with optimal sharing of risk between several parties, one example is risk sharing between an insurance company and an insurer. We also look at implications of equilibrium in capital markets for financial risk premiums and the equilibrium interest rate. If time allows, the content is supplemented with other topics within this general subject.
After completing thous course, students should
- Understand how risk aversion and risk characteristics affect insurance premium and risk premiums in capital markets.
- Understand the meaning of equilibrium and calculate equilibrium in some standard models.
- Be familiar with the concept Pareto optimal risk allocation, a risk allocation concept different form standard insurance.
- Be able to analyse stylized situations where the individual is facing economic uncertainty. Examples of such situations are demand for insurance or more complex risk sharing between several agents.
- Be fluent in the use of the basic tools to analyse and rank risks.
- Be able to assess whether insurance is needed, if so, the amount of insurance to which premium.
- Understand the basics of uncertainty in how it is included in models.
The course is based on two weekly lectures, in total four hours every week. About five exercise sets are distributed and solutions are discussed in class.
Basic knowledge in mathematics and probability theory.
Requirements for course approval
Course approval is based on satisfactory completion of the exercise sets.
Four hour written exam. The exam can be answered both in English and Norwegian.
A - F
"Economic and Financial Decisions under Risk," Princeton University Press 2005. Authors: Eckhoudt, Gollier and Schlesinger.
- ECTS Credits
- Teaching language
Spring. Offered spring 2019.
Professor Svein-Arne Persson, Department of Finance, NHH.
Lectures will also be given by Helge Nordahl, vice president in Gard and Adjunct Professor at the Department of Management Science and Business Economics.