Balser Recording

In case you missed it, below is a link to the audio recording of the Drs. Balser talk in which he discusses maternity leave and maternal health. Unfortunately, we are unable to release his lecture on the promotion gap.

Audio starts at about 8:40:

Hosting Drs. Cary Balser

The Ave Maria Economics department is happy and excited to announce that it will be hosting Drs. Cary Balser of the University of Notre Dame in order to discuss maternity leave, the gender gap, and maternal health. We are very thankful to AEI and the James Madison institute for co-hosting this event. All members of the Ave Maria community are welcome and light refreshments will be served.

Essay Winner: Kealen Vasquez

The Ave Maria University Economics department is proud to publish its first blog post. We could bore readers with archaic nuances concerning economics, or with trivial and in-offensive content about something uninteresting.  Instead, our first post will be from one of our students.

Earlier this semester, the Econ dept hosted an essay writing contest inviting students to explore, advance, apply, or illustrate an idea that they found most appealing, counter-intuitive, or poignant in their economics classes. We had 4 winners in no particular order:

• Kealan Vasquez
• Niklas Jenkins
• Max Bodach
• Mairead Kennon

As winners of the essay contest, the students will attend the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:

Mr. Kealen Vasquez: Some Thoughts on Risk and Utility Functions

Utility Functions are crucial to understanding risk-aversion and risk-seeking behaviors. A risk-averse person has a concave utility function, such that losing money decreases utility more than gaining the same amount of money would increase utility. This idea makes intuitive sense: one might expect the average person to balk at the idea of betting $100 at the flip of a fair coin. Losing $100 hurts a risk-averse person more than gaining $100 benefits them.

Often I’ve thought about what my own personal utility function might look like, in order to understand why I feel inclined to make specific decisions. I have found that the state lottery has been a useful avenue with which to experiment with my preferences on risk. In particular, the Pick-4 game provides itself as a good measuring stick. In the game you choose 4 numbers, each between 0 and 9. There is no jackpot for Pick-4; instead they only have set prizes based on which game you decide to play. A “Straight” game, for example, costs 50 cents to play and you only win if you get the 4  numbers right and in the correct order. The prize for winning the “Straight” game is $2500 and the probability of winning 1 in 10,000, meaning the expected value of the ticket is 25 cents, which is less than the cost for the ticket. 

Alternatively, I could play “Box” games, in which one wins by getting the numbers right in any order. Then, for example, all 12 combinations of my numbers 5-0-4-0 can win, but the prize is only $200, about one twelfth the“Straight” prize. Thus the expected value is still about 25 cents, but the prize is distributed in a different way. In fact, Pick-4 sets all of is prize amounts so that every ticket has an expected value of about 25 cents, rounded to make uniform prize amounts. This makes the game an

excellent measurement of risk preferences: because every ticket has the same expected value, they only differ in deviation, a very basic yet intuitive measure of risk. I noticed in my behavior that I first started playing the “Straight” games, but I decided early on that the “Box” games were more worthwhile, at least for me. Using these kinds of decisions as data, I, playing enough lottery, might be able to better estimate my utility function.

The fact that I feel justified in even playing this lottery game means that at low values of money, I am risk-seeking, and my utility function is convex. However, I know that at large values of money, I am risk-averse: for example, I would not place a $100 bet on a fair coin toss. Then my utility function must at one point flip from being convex to concave, forming a kind of “S” shape. I suspect that this point for me is likely less than $1, because I find it difficult, if not impossible, to save pocket change without losing it. On low values of money then I must be placing very low--negligible, even--values of utility. I’ll call those values for which my utility function is convex “petty money”. Millions of people play the lottery each and every day, so it seems fair to assume that it is not abnormal to see people with utility functions that start convex and flip to concave at a certain point. I’d like to speculate that for each person there is a range between $0 and some positive amount that counts as “petty money”, for which values the person is risk-seeking, before their utility function turns concave. 

Traditionally, one might view a risk-seeking person as reckless and impulsive, but it could be the case that a person who is risk-seeking at higher values just has a larger range for “petty money”. Then risk-seeking behavior might be an indicator of security, or even wealth.