1. The probability of any given US citizen dying in an automobile accident in a year is about 0.00015. Alas, this is not a number that is easy to comprehend. Explain this number in a way that is easier for a jury or judge to understand. (one sentence to one paragraph answer)

2. Failure to understand cumulative probabilities. As discussed in class, the difference between a probability of 0.0001 and 0.0002 can have considerable practical importance, even though both probabilites are tiny. Using words or mathematical symbols, develop an argument to explain this point. (one paragraph answer).

Comment on answer: You most definitely do not need a calculator for the final exam. Use English words or mathematical symbols to lay out the calculations that you would need to undertake to demonstrate the above point.

3. Bernstein makes a number of points concerning how humans view and respond to risk and uncertainty. For each of the following points, provide an example to illustrate it: (one sentence to one paragraph answer for each)

3a. Humans respond to risk irrationally---at least under certain definitions of irrational.

Answer hint: There are many possible answers, since there are many ways in which human response to risk is nonsensical.

3b. This irrational behavior is predictable.

3c. "When the choice involves losses, we are risk-seekers, not risk-averse" (Bernstein 1996).

3d. Many people use uncertainty as a proxy (or model) of risk.

4. As discussed by Bernstein (1996), rather than make entirely rational decisions, humans employ many decision-making heuristics.

4a. What is an example of such a decision-making heuristic? (one sentence to one paragraph answer)

4b. In a very real sense, a decision-making heuristic is a model of the decision-making process that one would like to employ, but cannot. For the example you discussed in 4a, explain why humans are unable to employ the theoretically best decision-making process. (one paragraph answer)

5. The bounded rationality model of human decision-making states that we make decisions by considering only a restricted set of possible alternatives. According to this theory, why don't humans employ a more complete set of alternatives?

Answer: Humans have only limited ability to process information. Considering a more complete set of alternatives requires more information processing ability than what our brains are capable of.