Teaching1 Economics Students about Different Models for Dealing with Uncertainty and Risk Besides the Standard Capital Asset Pricing Model (CAPM) and the Subjective Expected Utility (SEU) Model

Abstract

There has been a great deal of uncertainty (doubt) and fear about how the COVID-19 corona virus would impact the world's economies in the future. This fear of the future would explain the manner in which individuals and countries have responded to the outbreaks by buying gold and/or other "hard" assets, which decision makers have great confidence in. In times of uncertainty (doubt), holding gold is a reliable and dependable way of combatting the likely impact of un-certain events on future events. The COVID-19 virus has generated a great deal of fear regarding the economic ef-fects of the virus on the economy. Holding hard assets would allow the holder of such assets to feel safer and more secure about their ability to successfully deal with and/or wait out such events . We argue that undergraduate students would be better prepared for decision making in the real world after they graduate if the standard approach taken in microeconomic courses based on risk assessment alone was supplemented by alternative treatments that do not model decision making as taking place only under the assumption of additivity and linearity as is made in CAPM and SEU. It is important to teach students how to modify their probabilities to transform them into decision weights which (a) consider uncertainty, but (b) simplify to probabilities if the uncer-tainty should diminish substantially in the future. This is accomplished by using Tversky -Kahneman's Cumulative Prospect Theory and Keynes's Conventional Coefficient model from the A Treatise on Probability. © 2022 Better Advances Press. All rights reserved.