Module 1 / Lesson 2
Risk Settings, Risk Preferences, and Strategies to Manage Risks
We established the simplest setting in which we can explore risks, insurance, other risk management strategies, and attitudes towards risk in a more formal and mathematical way.
We will also continue building on our foundation from previous lessons. In Lesson 1.3, we explored the taxonomy of risk management strategies. In Lesson 2.1, we established the formal risky setting. In Lesson 2.2, we explored risk transfer. Now, we shift focus to additional strategies including Prevention (Lesson 2.5), Saving (Lesson 2.6), Information (Lesson 2.7), Recovery (Lesson 2.8), and Existential Risks (Lesson 2.9).
Lesson Goals
- Describe risky settings using simple models
- Learn how insurance reduces risk in risky settings
- Understand expected value as a way to describe risky situations
- Explore why risk-averse individuals may willingly pay for insurance
- See how expected utility explains real-world decision-making under uncertainty
- Explain how risk can be managed (prevention, mitigation, resilience, and information)
- Distinguish between non-existential and existential risks
- Use all four tools for managing risk
Math Trigger Warning: Lesson 2 contains more math than the rest of the course. While we want you to understand the content, this level of math is not representative of the rest of the course. You should have no trouble excelling even if math isn't your favorite subject.
Lesson guide
- Lesson 2.1: Risk and Loss Without Insurance
- Lesson 2.2: Insurance as Risk Reduction
- Lesson 2.3: Expected Value
- Lesson 2.4: Risk Preferences and Utility
- Lesson 2.5: Prevention: Self-Protection vs Self-Insurance
- Lesson 2.6: Saving as Risk Management Strategy
- Lesson 2.7: Information & Early Warning
- Lesson 2.8: Recovery
- Lesson 2.9: Managing Existential and Global Catastrophic Risks