The Economics of Uncertainty

Course No. 5523
Professor Connel Fullenkamp, Ph.D.
Duke University
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Course No. 5523
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Course Overview

Economies are deeply complex systems. The global marketplace—even national, state and local economies—involve many economic actors behaving in rational and irrational ways, sustaining a dizzying array of interconnected activity. Because of the number of participants involved in this global exchange, the unpredictability of their actions, and the sheer variety of possible actions, some degree of economic uncertainty is inevitable.

In one of the most dramatic displays of economic uncertainty in our times, a wave of toxic loans almost brought down the American financial system in 2008-2009, and with it jobs and savings. Few experts forecast this catastrophe, which stands as a lesson in the power of economic forces to defy our predictions. This event may have been exceptional, but every day we are all at the mercy of economic uncertainty in matters such as these:

  • Stock market: Although the stock market has a long-term upward trend, short-term volatility can wipe out a large fraction of an investor’s wealth in a single day.
  • Careers: No job is safe from the constant assault of domestic competition, offshoring, innovation, downsizing, government regulation, and other factors.
  • Insurance: The types of insurance products have skyrocketed to the point that you could easily spend all of your earnings to cover possible disasters.
  • Retirement: Is your retirement secure if you live to be 100? What if you suffer a debilitating chronic disease? How will your nest egg fare if inflation soars?

Uncertainty also plagues us in smaller ways. For example, everyone is familiar with rising prices, but the Internet now makes it possible for online shoppers to be charged more based on their buying history, adding a new level of unpredictability to pricing. And anytime you hire someone for a service—from roofing to dentistry—you face the principal-agent problem, in which the person hired may take unethical advantage of your lack of expertise.

Indeed, these large and small risks are so pervasive that it is all too easy to conclude that nothing can be done. But economic uncertainty is like the weather: you can’t stop storms from happening, but understanding how and why they happen allows you to be prepared. In the same way, economic uncertainty is beyond our control, but we’re in a much better position to respond if we know what’s happening and why.

In 24 practical and empowering half-hour lectures, The Economics of Uncertainty takes the mystery and dread out of uncertainty, giving you the tools to deal with risk in every phase of your life. Your guide is Professor Connel Fullenkamp, an acclaimed economist and award-winning teacher at Duke University, where he is Professor of the Practice and Director of Undergraduate Studies in Duke’s nationally ranked Economics Department.

Deepen Your Knowledge of Economics

Gearing his presentation to novices as well as those with a background in micro- and macro-economics, Professor Fullenkamp shows that the study of uncertainty sheds light on a wide range of phenomena, including:

  • financial markets
  • business cycles
  • inflation and deflation
  • free trade
  • regulation
  • strategic thinking
  • career development
  • family financial planning

The course also introduces fundamental ideas in probability, statistics, and game theory that give deep insight into the world of risk and require only high-school level mathematics. In addition, the critical thinking skills you acquire in The Economics of Uncertainty have broad applications beyond economics. For example, the decision tree approach to problem solving, presented in Lecture 7, can come to the rescue whenever you need to find the optimum path to any goal, whether it is selecting your next vacation destination or choosing the best college options for your child.

Enjoy the Expertise of a Personal Advisor

Governments and large financial institutions rely on teams of experts to steer them through the perilous waters of uncertainty. In The Economics of Uncertainty, Professor Fullenkamp serves as your personal advisor, explaining in detail how uncertainty works and providing valuable tips such as these:

  • Think critically: Knowing the two types of probability—frequency-based and subjective—helps you judge the claims of people who appeal to probability to convince you to take a particular action.
  • Weigh risk vs. benefit: When you have to choose between risky alternatives, start from the least risky choice and decide how much extra risk you can tolerate for a given amount of increased benefit.
  • Mix it up: Since you can’t negotiate prices when shopping online, be unpredictable. Don’t always take the first price you’re offered. Put some items in your shopping cart and then log off without buying them.
  • Cultivate your career: Companies thrive by having a comparative advantage over their competitors. Do the same in your job by identifying what you do better than most people. Then cultivate that strength.

Learn How to Survive and Thrive

The trick to surviving and thriving in an uncertain economy is to know the sources of risk and how much of a threat they pose. It also helps to have a guide as experienced, eloquent, and engaging as Professor Fullenkamp, who, in his consulting work, has designed and led training courses for bankers and government officials for the International Monetary Fund in Washington, D.C. With The Economics of Uncertainty, it is your turn to experience his fascinating seminars, covering topics such as these:

  • Black swans: Popularized by best-selling author and risk analyst Nassim Taleb, a black swan is a rare, baffling event with great impact. Professor Fullenkamp analyzes the 2008 financial crisis in light of this intriguing theory.
  • Asymmetric information: Often one party in a transaction has a monopoly on information—for example, in a used car sale. Discover how this problem affects every sector of the economy through adverse selection and moral hazard.
  • Compensation: Getting a job done well is often a matter of how the payment is made and what performance incentives are offered. Evaluate the risks and rewards of several approaches to compensation contracts.
  • Gambling: Even if you’ve never bought a lottery ticket or set foot in a casino, you gamble every day. Learn how to address economic decisions with a seasoned gambler’s knack for separating good bets from bad.

One of the most important lessons about uncertainty is that it’s built into the world. At times, the economy may seem like it’s careening out of control, but we are simply living through the fluctuating uncertainties that have always been with us. There’s no reason to despair, since uncertainty is a phenomenon that can be understood and managed. “Knowledge is power,” says an old proverb. After taking this invaluable course, you’ll have the essential background to manage your economic life toward a more secure future.

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24 lectures
 |  Average 30 minutes each
  • 1
    Man, Nature, and Economic Uncertainty
    Professor Fullenkamp begins with "black swan" events-occurrences that are considered as improbable as black swans. A notable recent example is the 2008 financial crisis. This leads to an examination of the nature of uncertainty and the best strategy for dealing with it. x
  • 2
    Turning Uncertainty into Risk
    When faced with an uncertain situation, try turning it into a "risky" situation. Risk is probability. Knowledge is power. This may sound counterintuitive, but it's a surprisingly effective approach, pioneered by University of Chicago economist Frank Knight. See where it applies and does not apply in economic settings. x
  • 3
    Five Ways to Face the Unknown
    In dealing with uncertainty, it makes sense to have an arsenal of different strategies. Explore five techniques for risk management that can be used in every sphere of life: producing information, diversifying, sharing risk, avoiding risk, and absorbing risk. Probe instructive examples of each. x
  • 4
    Probability: Frequency or Belief?
    Examine two different types of probability. Frequency-based probabilities rely on many examples of a phenomenon, while subjective probabilities call on personal experience and judgment, often drawing on relatively few cases. Learn to think critically about these two approaches, and know when to use them. x
  • 5
    How We Misjudge Likelihood and Risk
    Improve your ability to handle uncertainty by studying two ways that people reach decisions. System 1 excels at making snap judgments, while System 2 is analytical, methodical, and more time-consuming. Weigh the strengths and weaknesses of each, focusing on the problem of estimating probabilities. x
  • 6
    The Reward in Risk
    Having learned to convert uncertainty to risk in Lecture 2, now go deeper by investigating how probabilities can gauge rewards and risks. Test risk-assessing tools used in finance, including expected value, variance, standard deviation, coefficient of variation, Sharpe ratio, covariance, and beta. x
  • 7
    Decision Science Tools
    When is a risky project worth doing? Learn how corporate managers decide whether they should undertake a new enterprise. Discover that simple graphic aids, such as scenario analysis and decision trees, are powerful tools for weighing risk in both business and daily life. x
  • 8
    Gambling Economics
    Gambling makes some people nervous, but it gives valuable insight into any type of risk-taking activity, including investing and entrepreneurship. Explore the role of games of skill and chance in the economy, and apply their lessons to activities such as banking and retirement planning. x
  • 9
    Game Theory: Reveal or Conceal?
    Use game theory to shed light on strategic interactions, which are competitive transactions involving people or organizations. Such interactions can range from negotiating the sale of a house to pricing products for maximum sales. As an example, analyze an intriguing competition between two potato chip brands. x
  • 10
    Adverse Selection: Hiding in Plain Sight
    Adverse selection occurs when the lack of information by one party leads to a distorted result. See how this situation surfaces in many different contexts, from used car sales to investment deals to Internet purchases. Learn to recognize the adverse selection trap, and know how to correct it. x
  • 11
    Moral Hazard: Whom Do You Trust?
    Examine another outcome of asymmetric information: the moral hazard problem. This peril arose spectacularly in the 2008 financial crisis, with the widespread sale of bad loans to unwitting investors. But it also lurks in many small-scale transactions. Discover what you can do to combat it. x
  • 12
    The Principal-Agent Problem: When Mice Play
    Focus on a special case of moral hazard: the principal-agent problem, in which an agent is appointed to handle a matter beyond the expertise of the person doing the hiring (the principal). The agent may easily take unfair advantage of this situation, which covers everything from home repair to government contracting. x
  • 13
    Compensation Traps
    Delve into the uncertain realm of compensation contracts, which ideally motivate employees to do a good job, but too often have unintended consequences. Survey the pluses and minuses of efficiency wages, piecework, milestone payments, commissions, promotions, stock options, and other incentives. x
  • 14
    Caring, Sharing, and Risk Bearing
    Altruism is more complicated than simple selflessness. Instead, it may be the world's oldest and most effective risk-sharing system. Discover the power of viewing altruism as economists do-as a mathematical expression called the utility function. Also study altruism's connection to the moral hazard problem. x
  • 15
    Mayhem! Insurance Protection
    Investigate the multitude of ways you can insure against misfortune, from extended warranties to travel insurance to identity-theft protection-not to mention health, car, home, and life insurance. Learn how insurance products work, and get tips on what you should cover and at what value. x
  • 16
    Uncertainty in the Numbers
    Statistics are essential tools for dealing with uncertainty, but they should be used with caution. Put numbers such as the unemployment rate and consumer price index into context, probing how such statistics are measured and what the sampling error and confidence interval say about their reliability. x
  • 17
    The Business Cycle's Wheel of Fortune
    Nothing is as certain and yet so unpredictable as the business cycle; economic expansion is invariably followed by a recession-and vice versa-but economists are at a loss to forecast the timing. Study different theories of the business cycle, and learn how to prepare for the next boom or bust. x
  • 18
    The Danger of Inflation
    Even in times of low inflation, no one knows when prices will take off again. Look into the causes of inflation, efforts to control it, and the surprising wisdom of promoting a small degree of inflation. Also examine the disaster of deflation, which is a generalized drop in prices. x
  • 19
    Extreme Markets
    At any given moment, some market somewhere is making headlines because it's either hitting record highs or crashing down to earth. Learn how to approach the uncertainty of financial markets with savvy and common sense. Focus on strategies that can help you reach your financial goals. x
  • 20
    Regulation, Innovation, Excess
    Government policies are a major source of uncertainty, since they can alter our lives in unpredictable ways. Study the surprising outcomes from several government interventions in the U.S. economy. In particular, look at the regulatory cycle model, which shows how a complex system responds to new regulations. x
  • 21
    Global Trade in Employment
    Free trade produces uncertainty and anxiety in economic players at all levels. Understand how comparative advantage governs who benefits in the competition for international trade. Then hear Professor Fullenkamp's tips for how individuals can cultivate their own comparative advantage in the labor market. x
  • 22
    No Limits to Growth
    Look at possible catastrophes that are decades away: alarming trends such as overpopulation, scarcity of raw materials, and environmental degradation. Observe that society has so far escaped the worst predictions of experts, and explore why that is and what the future may really hold. x
  • 23
    Hedging Business and Personal Risks
    Examine tools that professionals use to hedge against financial risk, such as forward contracts and financial options. Study the suitability of these instruments for individuals. Then probe a more flexible strategy: real options, which are opportunities that can be seized or declined as conditions warrant. x
  • 24
    Stress Testing Your Finances
    Close by learning how to take the economic "stress test," inspired by bank evaluations made in the wake of the 2008 financial crisis. This simple exercise helps you anticipate the most significant reversals you are likely to meet, helping you approach uncertainty with confidence and calm. x

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  • 24 lectures on 4 DVDs
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  • Suggested readings

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Your professor

Connel Fullenkamp

About Your Professor

Connel Fullenkamp, Ph.D.
Duke University
Professor Connel Fullenkamp is Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University. He teaches financial economics courses, such as corporate finance, as well as core courses, such as economic principles. In addition to teaching, he serves as a consultant for the Duke Center for International Development. Prior to joining the Duke faculty in 1999, Professor...
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Reviews

The Economics of Uncertainty is rated 3.9 out of 5 by 13.
Rated 4 out of 5 by from Good survey but pity the pronouns Contrary to the 3-star review, I found that the professor did a good job of presenting a deep-enough view of the topics, and of tying theme together (full disclosure, I have an MBA and am ABD in business economics). For someone with a decent grounding in high school math (algebra, addition, division) he provides a well-framed look at uncertainty and its application in many everyday circumstances. On completing the course the listener should have a much better understanding of uncertainty and related probabilities, insurance, and various moral hazard and incentive issues. While I don't always agree with his conclusions, he gets the material right first. Now, two nits to pick. First, when he deals with a concept he labels "trust" on which he and a colleague have worked, he lurches into a common academic sinkhole: coopting a common word, redefining it in a very specific, non-intuitive fashion that no one else in the world uses, then using that word like its original English word. No, professor, "trust" as I use the word with a friend is NOT that each of us has a similar (identical?) beta as a multiplier for the other's utility function. I won't go on any further, but as with many academics, once he's firmly in his sinkhole of "trust," he draws all sorts of silly conclusions. Annoying, but doesn't really diminish a good course. Second, the poor man must have suffered greatly at the hands of the feminist PC police. He is wholly schizophrenic when it comes to using third-person pronouns. We get lots of "they" and "them" for singular subjects. We get a fair smattering of "he or she" and "hizzorher," although oddly no "she or he..." And once in a while we get "she." We never get the proper English pronoun for an unnamed, unidentified third person singular: "he." I suppose I should be grateful we don't hear, "he slash she."
Date published: 2015-07-30
Rated 3 out of 5 by from A Light Survey A shallow survey of the topic -- a good initial exposure to the topic -- but probably unsatisfying for a crude familiarity with the material. Instructor is very good. Material is not cumulative and does not build towards any higher level understanding of the domain like the best GC do.
Date published: 2015-07-02
Rated 5 out of 5 by from Highly Practical, Surprisingly Compelling Prof. Fullenkamp delivers a remarkable practical and fascinating series of lectures on a topic that easily could've wallowed in a vortex of esoteric economic data and theories. He covers innumerable topics, recent historical events, and life events that are directly relevant to anyone: the Great Recession, buying a car, life insurance, market bubbles in general, funding a child's future -- or your own, through retirement. But the course's real value comes in addressing all these and more topics not in a theoretical sense and as a series of abstract studies, but as we actually experience them: with inherent uncertainty. And by meeting us at this very personal level, you literally get to engage in your own decision-making process with him. This leads me to Lecture 24, which in and of itself is worth the price of the course 10-fold. He walks you through creating your own personal financial stress test. Instead of making it scary and full of gotcha moments, where you thought you were set only to find out how little prepared you actually are for unexpected financial challenges, he encourages you. You need a new car. Your mutual fund gets gutted. A child gets married unexpectedly. Don't "stress" about it. Your best insurance is to prepare for the unexpected, and to know how to react when these events occur. He practically holds your hand, showing you not just how critical the stress test is to do, but how to use it constructively and how to use time -- your greatest asset in uncertainty -- to mitigate your financial risk. It's a remarkably deft talent to present such a fraught topic without scaring you, and in fact convincing you that, yes, "I need to do this, and I'll be much more confident for doing so." Prof. Fullenkamp is exactly the wise and encouraging adviser we would all be lucky to have regarding our own finances. Fortunately, with this course (and his previous 2), we actually do.
Date published: 2015-06-14
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