Tag: Risk Management
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Moral Hazard
Moral hazard refers to situations where a party takes on riskier behavior because they’re shielded from the consequences. It often occurs in insurance, finance, and healthcare, potentially leading to market inefficiencies and higher costs. Strategies exist to mitigate it.
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Principal-Agent Problem
The Principal-Agent Problem occurs when a person (the principal) hires someone else (the agent) to act for them, but the agent may not always act in the principal’s best interest due to differing information or motives. Solutions involve creating better incentives and transparency.
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Decision Tree
A Decision Tree is a graphical tool used to map complex decision-making processes, showcasing different paths and their outcomes. It’s useful for handling uncertainty, risk analysis, and sequential decisions, but can be complicated or misleading if not used properly.
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Arbitrage
Arbitrage is a financial strategy of profiting from price differences in separate markets. It involves buying low in one market and selling high in another. This tactic, which requires market knowledge and mathematical models, contributes to market efficiency and price equilibrium.