Risk Theory and Modeling

- Definitions and sources of risk - Risk attitude and the utility function - Random variables and statistical measures of risk evaluation - Value-at-risk - Portfolio optimization - Production decisions under risk - Price analysis - Real options

Upon completion of the module, students are able to - understand the various sources of risk in a broad range of sectors and industries, - understand how economic decisions are made in the presence of risk, - apply mathematical tools to evaluate risk with respect to products, processes and structure related decisions - and understand how decision-making under risk is analyzed in the scientific literature

In a written examination (90 minutes, Klausur), students demonstrate their theoretical knowledge of risk and the intuition behind various concepts. In written answers regarding the measurement of risk and the decision-making under risk, they prove their understanding of these concepts in both theory and practice. The ability to apply mathematical tools is proven by the solution of specific calculus problems. Further, students discuss assumptions under which a proposed research approach is appropriate and whether there might be better ways to investigate a specific research problem.

Students taking this course should be familiar with the basics of microeconomics as well as probability measurement. However, all necessary concepts will be introduced before application.

The module consists of 2 SWS lectures and 2 SWS exercises. During lectures, concepts and tools will be presented to the students in slide shows. An interactive lecture atmosphere is intended to ensure that students’ questions are answered right away. Further, exercises accompany the lecture contents. These exercises are meant to illustrate lecture contents and provide students with hands- on experience with the presented concepts to make them more graspable. Toward the end of the course, when students are acquainted with the most important concepts, selected publications (both seminal papers and most recent ones) in risk research are presented and discussed. This provides students with an insight into how the lecture contents are applied in the scientific literature.