Robert H. Frank,
Cornell University
Ian C. Parker,
University of Toronto
| Adverse selection | Process by which the less desirable potential trading partners volunteer to exchange.
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| Certainty equivalent value | The certainty equivalent value of a gamble is the sum of money for which an individual would be indifferent between receiving that sum and taking the gamble.
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| Costly-to-fake principle | For a signal to an adversary to be credible, it must be costly to fake.
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| Diminishing marginal utility | For a utility function defined by wealth, one in which the marginal utility declines as wealth rises.
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| Expected utility | The expected utility of a gamble is the expected value of utility over all possible outcomes.
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| Expected value | The weighted sum of all possible outcomes, with each outcome weighted by its probability of occurrence.
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| Fair gamble | A gamble whose expected value is zero.
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| Full-disclosure principle | Individuals must disclose even unfavourable qualities about themselves, lest their silence be taken to mean that they have something even worse to hide.
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| Law of large numbers | A statistical law that says that if an event happens independently with probability p in each of N instances, the proportion of cases in which the event occurs approaches p as N grows larger.
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| Moral hazard | The tendency whereby people expend less effort protecting those goods that are insured against theft or damage.
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| Risk averse | Preferences described by a utility function with diminishing marginal utility of wealth.
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| Risk neutral | Preferences described by a utility function with constant marginal utility of wealth.
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| Risk seeking | Preferences described by a utility function with increasing marginal utility of wealth.
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| Signalling | Communication that conveys information.
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2002 McGraw-Hill Higher Education