Required Reading

Bernstein. Against the Gods. Read Chpt. 16. The failure of invariance. This is not in the Required Course Pack.

Questions for class discussion

1. We will work through each of Bernstein's examples of how investors make mistakes when attempting to quantify financial risk. Where possible, find an analogy using the methylmercury risk assessment for each of Bernstein's examples. Listed below are the major points that I would like you to draw from Bernstein. I anticipate working through these one at a time in class, and where possible, thinking about possible applications to methylmercury risk. Here are some points:

A. Humans behave irrationally (At least under certian definitions of irrationality.) I would add that human irrationality is predictable---it tends to always be in the same directions.

B. Tendency to ignore regression to the mean. What exactly is regression to the mean? Again, how does this concept apply to the types of risk we have discussed this semester?

C. Heuristics as a model for rational decision making.

D. Humans are "risk-averse."

E. "When the choice involves losses, we are risk-seekers, not risk-averse."

F. "It is not so much that people hate uncertainty---but rather, they hate losing."

G. People are risk-averse with respect to what they already own, but are much less so with respect to what they do not own.

H. Too much information can impede decision-making.

I. Risk perception depends on "explicitness of its description."