measuring risk - must know all possible outcomes, probability of each outcome 

• sum of probabilities = 1
• objective interpretation - based on past events/experiments
• subjective interpretation - based on educated guess about future
• expected value, variability >> characterize payoff/risk
• expected income (value) = sum of product of probability and payoffs
  • probability of each case can change based on personal skills/tendencies
  • expected values same >> variability not always the same
  • E(X) = probability1(X1) + probability2(X2) + ...
• deviations - difference between expected and actual payoff
  • based on deviations from the mean
  • standard deviation - measures risk, equal to square root of average of squares of deviations
  • Ö(probability1(deviation1)2 + probability2(deviation2)2)
  • people generally want less risk