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15 RISK AND

15.1 INFORMATION
DESCRIBING RISKY OUTCOMES APPLICATION 15.1 Tumbling Dice and the Lucky
Number 7
15.2
EVALUATING RISKY OUTCOMES APPLICATION 15.2 Risk Premia for Employee
Stock Options
15.3
BEARING AND ELIMINATING RISK APPLICATION 15.3 If AIG Can Collapse,
Why Would Anyone Supply Insurance?
APPLICATION 15.4 Obamacare and Adverse
Selection in the Health Insurance Market
15.4
ANALYZING RISKY DECISIONS APPLICATION 15.5 Putting Money in a Hole
in the Ground?
15.5
AUCTIONS APPLICATION 15.6 The Winner’s Curse
in the Classroom
APPLICATION 15.7 Google AdWords

What Are My Chances of Winning?
No company better symbolizes the emergence of the Internet as a vehicle for commerce than Amazon.com.
Launched as “Earth’s Biggest Bookstore” in July 1995 by 32-year-old Jeff Bezos, Amazon.com now offers
DVDs, videos, toys, consumer electronics, clothing, tools, and even groceries. For some consumers,
Amazon.com is their first and only destination.
What would have happened if you had invested in Amazon.com? Suppose in September 1999, you
had bought $1,000 worth of Amazon’s stock. Figure 15.1 shows how the market value of that $1,000
investment would have changed over the next 11 years. In the first few months after your purchase, its value
would have grown, reaching about $1,060 by December 2001. However, over the next two years, the value
of your investment would have fallen substantially. By October 2001, in the wake of 9/11 and the bursting

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